<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
<TABLE>
<CAPTION>
<S> <C>
For the three month period ended September 30, 1999 Commission File Number: 333-90709
---------
</TABLE>
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE NONE
- -------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
3770 EMBASSY PARKWAY
AKRON, OHIO 44333-8367 (330) 670-3000
- ---------------------------------------- -------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
---- ----
Number of shares outstanding of common stock as of November 15, 1999: NONE
1
<PAGE> 2
<TABLE>
<CAPTION>
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Unaudited Financial Statements
Consolidated/Combined Statements of Operations for the period from August 13,
1999 to September 30, 1999, the period from July 1, 1999 to August 12, 1999
and the three month period ended September 30, 1998..........................................3
Consolidated/Combined Statements of Operations for the period from August 13,
1999 to September 30, 1999, the period from January 1, 1999 to August 12,
1999 and the nine month period ended September 30, 1998......................................4
Consolidated/Combined Balance Sheets as of September 30, 1999 and December 31, 1998........5-6
Consolidated/Combined Statements of Member's Interest/Stockholders' Equity
(Deficit) for the year ended December 31, 1998, the period from January 1,
1999 to August 12, 1999 and the period from August 13, 1999 to September 30, 1999............7
Consolidated/Combined Statements of Cash Flows for the period from August 13,
1999 to September 30, 1999, the period from January 1, 1999 to August 12,
1999 and for the nine month period ended September 30, 1998..................................8
Notes to Consolidated/Combined Financial Statements.......................................9-29
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....30-37
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................38-42
Item 2. Changes in Securities.......................................................................42
Item 3. Defaults Upon Senior Securities.............................................................42
Item 4. Submission of Matters to a Vote of Security Holders.........................................42
Item 5. Other Information...........................................................................42
Item 6. Exhibits and Reports on Form 8-K............................................................42
Signatures..................................................................................43
</TABLE>
2
<PAGE> 3
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
For the Period From August 13, 1999 to September 30, 1999,
the Period From July 1, 1999 to August 12, 1999
and the Three Month Period Ended September 30, 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
The Company - The Predecessor - Combined
Consolidated ----------------------------------------------
Period From Period From Three Month
August 13, 1999 to July 1, 1999 to Period Ended
September 30, 1999 August 12, 1999 September 30, 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net sales $ 209,768 $ 51,949 $ 113,873
Cost of goods sold 208,972 51,413 114,246
--------------------- --------------------- ---------------------
Gross profit (loss) 796 536 (373)
Selling, general and administrative
expense 20,911 4,133 8,809
Depreciation and amortization expense 13,366 3,071 4,129
Other postretirement benefits (Note 10) 2,572 698 596
Workforce reduction charges (Note 10) 10,598 118 --
--------------------- --------------------- ---------------------
Operating loss (46,651) (7,484) (13,907)
Interest expense, net 17,207 4,267 9,504
Other (income) loss, net (282) (55) (895)
--------------------- --------------------- ---------------------
Loss before income taxes and
extraordinary item (63,576) (11,696) (22,516)
Provision for income taxes (Note 11) 205 44 4
--------------------- --------------------- ---------------------
Loss before extraordinary item (63,781) (11,740) (22,520)
Extraordinary loss from early
extinguishment of debt (Note 4) 23,342 -- --
--------------------- --------------------- ---------------------
Net loss $ (87,123) (11,740) (22,520)
=====================
Preferred stock dividends 32 97
--------------------- ---------------------
Net loss applicable to common shares $ (11,772) $ (22,617)
===================== =====================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
3
<PAGE> 4
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
For the Period From August 13, 1999 to September 30, 1999,
the Period From January 1, 1999 to August 12, 1999
and the Nine Month Period Ended September 30, 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
The Company - The Predecessor - Combined
Consolidated ----------------------------------------------
Period From Period From Nine Month
August 13, 1999 to January 1, 1999 to Period Ended
September 30, 1999 August 12, 1999 September 30, 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net sales $ 209,768 $ 474,565 $ 275,462
Cost of goods sold 208,972 446,771 265,232
--------------------- --------------------- ---------------------
Gross profit 796 27,794 10,230
Selling, general and administrative
expense 20,911 31,429 18,729
Depreciation and amortization expense 13,366 20,801 7,047
Other postretirement benefits (Note 10) 2,572 4,198 596
Workforce reduction charges (Note 10) 10,598 42,018 --
--------------------- --------------------- ---------------------
Operating loss (46,651) (70,652) (16,142)
Interest expense, net 17,207 43,801 22,691
Other (income) loss, net (282) 40 (1,163)
--------------------- --------------------- ---------------------
Loss before income taxes and
extraordinary item (63,576) (114,493) (37,670)
Provision for income taxes (Note 11) 205 420 63
--------------------- --------------------- ---------------------
Loss before extraordinary item (63,781) (114,913) (37,733)
Extraordinary loss from early
extinguishment of debt (Note 4) 23,342 -- --
--------------------- --------------------- ---------------------
Net loss $ (87,123) (114,913) (37,733)
=====================
Preferred stock dividends 224 289
--------------------- ---------------------
Net loss applicable to common shares $ (115,137) $ (38,022)
===================== =====================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
4
<PAGE> 5
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED BALANCE SHEETS
September 30, 1999 and December 31, 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
The Company - The Predecessor -
Consolidated Combined
September 30, 1999 December 31, 1998
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,807 $ 5,948
Accounts receivable, less allowances of $14,783 and
$6,897, respectively 182,935 82,053
Inventories (Note 5) 275,597 203,244
Assets held for sale (Note 17) 15,091 14,722
Prepaid expenses and other current assets 10,839 22,408
--------------------- ---------------------
Total current assets 488,269 328,375
Property, plant and equipment:
Land and improvements 14,599 12,496
Buildings and improvements 57,553 49,614
Machinery and equipment 651,651 295,159
Construction in-progress 18,857 13,366
--------------------- ---------------------
Total property, plant and equipment 742,660 370,635
Accumulated depreciation (55,223) (18,579)
--------------------- ---------------------
Net property, plant and equipment 687,437 352,056
Assets held for sale (Note 17) 11,687 11,687
Intangible assets, net of accumulated amortization of $8,272
and $10,456, respectively (Note 6) 184,215 173,377
Other assets 8,622 9,520
--------------------- ---------------------
Total assets $ 1,380,230 $ 875,015
===================== =====================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
5
<PAGE> 6
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED BALANCE SHEETS
September 30, 1999 and December 31, 1998
(In thousands of dollars, except share and per
share information)
(Unaudited)
<TABLE>
<CAPTION>
The Company - The Predecessor -
Consolidated Combined
September 30, 1999 December 31, 1998
--------------------- ---------------------
<S> <C> <C>
LIABILITIES AND MEMBER'S INTEREST/STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 222,343 $ 98,988
Accrued interest 9,257 4,885
Accrued compensation and benefits 46,585 29,272
Other postretirement benefits (Note 10) 14,462 4,200
Defined benefit pension obligations (Note 10) 40,723 62,001
Other accrued liabilities 49,162 43,430
Current maturities of long-term debt (Note 7) 2,149 3,805
Revolving credit facilities (Note 8) 300,205 147,200
--------------------- ---------------------
Total current liabilities 684,886 393,781
Long-term debt (Note 7) 480,944 422,483
Deferred income taxes (Note 11) -- 5,001
Accrued environmental liabilities (Note 16) 16,248 13,057
Other postretirement benefits (Note 10) 158,778 91,512
Defined benefit pension obligations (Note 10) 32,988 7,339
Other liabilities 1,638 6,411
--------------------- ---------------------
Total liabilities 1,375,482 939,584
Redeemable stock:
Series A preferred stock; $0.001 par value; authorized, 1,100 shares;
issued and outstanding, 1,100 shares 5,500
Commitments and contingencies (Notes 15 and 16)
Member's interest/stockholders' equity (deficit):
Member's interest 5,525 --
Bar Technologies Inc.
Series B preferred stock; $.001 par value; authorized, issued
and outstanding, 1 share --
Class A common stock; $.001 par value; authorized, 1,000,000
shares; issued and outstanding, 204,458 shares --
Class B common stock; $.001 par value; authorized, 600,000
shares; issued and outstanding, 536,829 shares 1
Class C common stock, non-voting; $.001 par value; authorized,
600,000 shares; issued and outstanding, 536,865 shares 1
Warrants outstanding 5,119
Republic Engineered Steels, Inc.:
Common stock; $.01 par value; 1,000 shares authorized; 1 share
issued and outstanding --
Additional paid-in capital 158,510
Accumulated deficit (230,018)
Accumulated other comprehensive loss (777) (3,682)
--------------------- ---------------------
Total member's interest/stockholders' equity (deficit) 4,748 (70,069)
--------------------- ---------------------
Total liabilities and member's interest/stockholders' equity (deficit) $ 1,380,230 $ 875,015
===================== =====================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
6
<PAGE> 7
<TABLE>
<CAPTION>
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF MEMBER'S INTEREST/STOCKHOLDERS' EQUITY (DEFICIT)
For the Year Ended December 31, 1998, the Period From January 1,
1999 to August 12, 1999 And the Period From August 13, 1999 to September 30, 1999
(In thousands of dollars)
(Unaudited)
Bar Technologies Inc.
----------------------------------------------------------
Series B Class A Class B Class C
Member's Preferred Common Common Common Warrants
Interest Stock Stock Stock Stock Outstanding
--------------- ------------- -------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ - $ - $ 1 $ 1 $ 5,119
Initial capitalization of Republic
as of September 8, 1998
Net loss
Preferred stock dividends
Other comprehensive loss
--------------- ------ ------- ------- -------- -----------
Balance, December 31, 1998 - - 1 1 5,119
Net loss
Preferred stock dividends
Other comprehensive income
--------------- ------ ------- ------- -------- -----------
Balance, August 12, 1999 - - 1 1 5,119
Exchange of member's interest to
effect combination $ 92,648 (1) (1) (5,119)
Net loss (87,123)
Other comprehensive income
--------------- ------- ------- ------- -------- -----------
Balance, September 30, 1999 $ 5,525 $ - $ - $ - $ - $ -
=============== ======= ======= ======= ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
<TABLE>
<CAPTION>
Republic
Engineered Accumulated
Steels, Inc. Additional Other
Common Paid-In Accumulated Comprehensive
Stock Capital Deficit Income (Loss)
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $ 63,055 $ (116,061) $ (494)
Initial capitalization of Republic
as of September 8, 1998 $ - 95,455
Net loss (113,572)
Preferred stock dividends (385)
Other comprehensive loss (3,188)
--------------- -------------- -------------- ---------------
Balance, December 31, 1998 - 158,510 (230,018) (3,682)
Net loss (114,913)
Preferred stock dividends (224)
Other comprehensive income 2,648
--------------- -------------- -------------- ---------------
Balance, August 12, 1999 - 158,510 (345,155) (1,034)
Exchange of member's interest to
effect combination (158,510) 345,155
Net loss
Other comprehensive income 257
--------------- -------------- -------------- ---------------
Balance, September 30, 1999 $ - $ - $ - $ (777)
=============== ============== ============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
<TABLE>
<CAPTION>
Total
Member's
Interest/
Stockholders' Comprehensive
Equity (Deficit) Income (Loss)
-------------- ---------------
<S> <C> <C>
Balance, January 1, 1998 $ (48,379)
Initial capitalization of Republic
as of September 8, 1998 95,455
Net loss (113,572) $ (113,572)
Preferred stock dividends (385)
Other comprehensive loss (3,188) (3,188)
-------------- ---------------
Balance, December 31, 1998 (70,069) $ (116,760)
===============
Net loss (114,913) $ (114,913)
Preferred stock dividends (224)
Other comprehensive income 2,648 2,648
-------------- ---------------
Balance, August 12, 1999 (182,558) $ (112,265)
===============
Exchange of member's interest to
effect combination 274,172
Net loss (87,123) $ (87,123)
Other comprehensive income 257 257
-------------- ---------------
Balance, September 30, 1999 $ 4,748 $ (86,866)
============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
7
<PAGE> 8
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
For the Period From August 13, 1999 to September 30, 1999,
the Period From January 1, 1999 to August 12, 1999
and the Nine Month Period Ended September 30, 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
The Company - The Predecessor - Combined
Consolidated ----------------------------------------------
Period From Period From Nine Month
August 13, 1999 to January 1, 1999 to Period Ended
September 30, 1999 August 12, 1999 September 30, 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (87,123) $ (114,913) $ (37,733)
Adjustments to reconcile net cash used in
operating activities:
Extraordinary loss from
extinguishment of debt 23,342 -- --
Depreciation and amortization 8,876 32,086 10,171
Decrease in working capital 33,358 14,456 17,998
Other (63,285) 44,222 (1,283)
--------------------- --------------------- ---------------------
NET CASH USED IN OPERATING ACTIVITIES (84,832) (24,149) (10,847)
--------------------- --------------------- ---------------------
Cash flows from investing activities:
Capital expenditures (16,588) (35,143) (14,684)
Acquisition, net of cash acquired -- -- (154,260)
--------------------- --------------------- ---------------------
NET CASH USED IN INVESTING ACTIVITIES (16,588) (35,143) (168,944)
--------------------- --------------------- ---------------------
Cash flows from financing activities:
Proceeds from long-term debt 419,500 -- 65,045
Capital contributions 155,000 -- 95,455
Net proceeds under revolving credit
facilities 116,424 66,581 25,350
Repayments of long-term debt (561,831) (1,696) (2,383)
Preferred stock dividends -- (224) (7)
Deferred financing costs (30,000) -- --
Other financing activities - net (1,185) (4,315) (289)
--------------------- --------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 97,908 60,346 183,171
--------------------- --------------------- ---------------------
Effect of exchange rate changes on cash 727 (410) (219)
--------------------- --------------------- ---------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,785) 644 3,161
Cash and cash equivalents-beginning of period 6,592 5,948 3,391
--------------------- --------------------- ---------------------
Cash and cash equivalents-end of period $ 3,807 $ 6,592 $ 6,552
===================== ===================== =====================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized $ 10,416 $ 46,236 $ 18,208
===================== ===================== =====================
Cash paid for income taxes, net $ -- $ 156 $ 181
===================== ===================== =====================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
8
<PAGE> 9
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
(In thousands of dollars)
(Unaudited)
1. NATURE OF OPERATIONS, ORGANIZATION AND OTHER RELATED INFORMATION
Republic Technologies International, LLC ("RTI" or the "Company") manufactures
and markets special bar quality ("SBQ") steel bar products. SBQ steel bar
products are high quality hot-rolled and cold-finished carbon and alloy steel
bars and rods used primarily in critical applications in automotive and
industrial equipment. The Company produces a wide range of SBQ steel products
and supplies a diverse customer base that includes leading automobile and
industrial equipment manufacturers and their first tier suppliers.
The Company was formed in a combination completed on August 13, 1999 (the
"Combination"). The Combination was completed through a series of mergers, asset
transfers and related steps as set forth in a Master Restructuring Agreement
among Bar Technologies Inc. ("Bar Tech"), Republic Engineered Steels, Inc.
("Republic"), USS/Kobe Steel Company and various of their affiliates. Following
the Combination, RTI, a newly formed legal entity, directly or indirectly owns
and operates all of the assets of Bar Tech, Republic and the SBQ steel products
business of the USS/Kobe Steel Company ("USS/Kobe").
Bar Tech and Republic have been operated under common management and ownership
control since prior to the Combination. The consolidated financial statements of
RTI are being presented from the date of the Combination. Comparative combined
financial statements are being presented for Bar Tech and Republic for the
periods that they were under common control prior to the Combination (the
"Predecessor").
Republic has been under common management and control since September 8, 1998,
the date acquired. The acquisition of Republic has been accounted for as a
purchase. The combining of Bar Tech and Republic in the Combination is being
accounted for as a common control merger like a pooling of interests. The
acquisition of USS/Kobe as part of the Combination is being accounted for as a
purchase. See Note 4 for additional information related to the common control
combination of Bar Tech and Republic and information related to the acquisitions
of Republic and USS/Kobe.
Prior to the formation of RTI, the individual companies, Bar Tech, Republic and
USS/Kobe, incurred substantial losses. As a result of the Combination, the
Company has substantial indebtedness and is highly leveraged. The Company's
inability to pay interest and principal or to refinance indebtedness could have
a material adverse effect on the Company's financial condition and results of
operations. The Company's future performance is subject to the success of its
consolidation plan pursuant to which RTI expects to create a more efficient,
higher quality network of production facilities operated by a smaller and more
flexible workforce. The success of the consolidation plan will depend upon many
factors including the Company's ability to rationalize its production facilities
and headcount, enhance the productivity of its remaining facilities through
facility specialization and targeted capital investment, eliminate redundant
overhead costs and produce internally more raw materials currently purchased
from third parties. Also contributing to the Company's future success are
general economic conditions and financial, competitive, regulatory, labor and
other factors, many of which may be unforeseen or beyond the Company's control.
In order to implement the consolidation plan or to respond to adverse
developments in factors affecting its business, the Company may need to borrow
additional funds under its revolving credit facility or, to the extent that the
funds are not available thereunder, to obtain additional financing to meet its
cash flow requirements. Restrictive covenants included in the indenture and
other debt obligations may have the effect of limiting the Company's ability to
incur additional indebtedness, or sell assets (most of which are pledged), and
may otherwise limit the operational and financial flexibility of the Company.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated/combined financial statements contain
results for Bar Tech for the three and nine months ended September 30, 1999 and
1998, the results for Republic for the period from September 8, 1998 to
September 30, 1998 and for the three and nine months ended September 30, 1999,
and the results for USS/Kobe for the period from August 13, 1999 to September
30, 1999. To conform to the predecessors' fiscal periods for presentation
purposes, the three and nine month periods ended closest to September 30, 1999
and 1998 and the year ended December 31, 1998 were used herein. Prior period
results are not comparable with the current periods due to the acquisitions of
Republic and USS/Kobe.
9
<PAGE> 10
The consolidated/combined financial statements and other financial information
included herein have been prepared by RTI and are unaudited. Although management
believes that all adjustments, including normal recurring adjustments, necessary
for a fair presentation have been made, interim periods are not necessarily
indicative of the results of operations for a full year.
The consolidated financial statements include the accounts of RTI and its wholly
owned subsidiaries: Bliss & Laughlin, LLC ("BLI"), Canadian Drawn Steel Company,
Inc. ("CDSC"), Nimishillen & Tuscarawas, LLC ("N&T") and Oberlin Insurance
Company ("OIC"). The combined financial statements include the accounts of Bar
Tech and its wholly owned subsidiaries and Republic and its wholly owned
subsidiaries for the periods that they were under common control prior to the
Combination. All significant intercompany balances have been eliminated in
consolidation/combination.
The Company operates in three reportable segments: hot-rolled, cold-finished and
specialty steels. In connection with the acquisition of Republic, the Company
intends to sell the specialty segment of the business. The Company manages the
reportable segments as separate strategic business units. Differences between
the segments include manufacturing techniques and equipment, competition and
end-users. The Company is in the process of selling its specialty steels
division to Haynes International ("Haynes"). The Company and Haynes are
affiliates as both companies are controlled directly or indirectly by entities
associated with The Blackstone Group. The accompanying consolidated/combined
financial statements reflect the specialty division as a discontinued business
in accordance with Accounting Principles Board Opinion No. 30. See Note 17 for
further information related to discontinued operations.
The combination of USS/Kobe into RTI and the Republic acquisition were accounted
for as purchases as of their respective acquisition dates. Under purchase
accounting, the total purchase price of Republic has been allocated to the
assets acquired and liabilities assumed based on their respective fair values as
of September 8, 1998. Under purchase accounting, the total purchase price of
USS/Kobe will be allocated to the assets acquired and liabilities assumed as of
August 13, 1999, based on valuations and other studies that are not yet
finalized. For the combination of USS/Kobe into RTI, a preliminary allocation of
the purchase price has been made to reduce property, plant and equipment for the
entire amount that the historical net equity of USS/Kobe exceeds the estimated
purchase price (i.e., purchase discount).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company considers all short-term investments
with maturities at the date of purchase of three months or less to be cash
equivalents.
INVENTORIES - Inventories are carried at the lower of cost or market (net
realizable value). Cost is determined using the first-in, first-out (FIFO)
method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost
and include improvements that significantly extend the useful lives of existing
plant and equipment. The Company provides for depreciation of property, plant
and equipment on the straight-line method based upon the estimated useful lives
of the assets. The range of estimated useful lives of the Company's assets are
as follows:
Buildings and improvements 39 - 40 years
Machinery and equipment 3 - 30 years
Repairs and maintenance costs are expensed as incurred. Capital expenditures
that are not able to be put into use immediately are included in
construction-in-process. As these projects are completed, they are transferred
to depreciable assets. Net gains or losses related to asset dispositions are
recognized in earnings in the period in which the disposition occurs.
INTANGIBLE ASSETS - Intangible assets consist primarily of goodwill, trademarks,
patented and unpatented technology and other intangible assets arising from the
acquisitions of Bar Tech and Republic by Blackstone Capital Partners II Merchant
Banking Fund L.P. and its affiliates (together, "Blackstone") and Veritas
Capital Fund, L.P. and its affiliates (together, "Veritas") and the combination
with USS/Kobe. Goodwill is being amortized over the period of expected benefit
of 40 years. Other acquisition related intangible assets are being amortized
over the period of expected benefit ranging from 28 months to 40 years.
Intangible assets also include deferred loan and bond fees and intangible
pension assets. The deferred loan and bond fees are being amortized using the
effective interest rate method over the lives of the related debt instruments.
10
<PAGE> 11
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets, consisting of property,
plant and equipment and intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the recovery amount or fair value, as
defined, of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
INCOME TAXES - The Company is a limited liability company that is treated
similar to a partnership for U.S. federal and state income tax purposes and,
accordingly, has no income tax provision or deferred income tax assets or
liabilities related to these jurisdictions. Amounts for income taxes consist
primarily of a provision for foreign taxes relating to the Company's Canadian
subsidiary, CDSC. Prior to the Combination, the Predecessor accounted for income
taxes pursuant to the asset and liability method.
ENVIRONMENTAL COSTS - The Company and other steel companies have in recent years
become subject to increasingly stringent environmental laws and regulations. It
is the policy of the Company to endeavor to comply with applicable environmental
laws and regulations. The Company established a liability for an amount which
the Company believes is adequate, based on information currently available, to
cover costs of remedial actions it will likely be required to take to comply
with existing environmental laws and regulations.
The recorded amounts represent an estimate of the environmental remediation
costs associated with future events triggering or confirming the costs that, in
management's judgement, are likely to occur. This estimate is based on currently
available facts, existing technology, and presently enacted laws and
regulations, and it takes into consideration the likely effects of inflation and
other societal and economic factors. The precise timing of such events cannot be
reliably determined at this time due to absence of any deadlines for remediation
under the applicable environmental laws and regulations pursuant to which such
remediation costs will be expended. No claims for recovery are netted against
the stated amount.
REVENUE RECOGNITION - The Company records revenues at the time the product is
shipped to its customers. Sales are made with no right of return.
FOREIGN CURRENCY TRANSLATION - Asset and liability accounts of the Company's
foreign subsidiary, CDSC, are translated into U. S. dollars using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. Translation
adjustments are reflected as a component of member's interest/stockholders'
equity (deficit).
Transaction gains and losses are included in the consolidated/combined
statements of operations as incurred. These amounts were not significant in all
periods presented.
COMPREHENSIVE INCOME (LOSS) - Total comprehensive income (loss) for the period
from August 13, 1999 to September 30, 1999, the period from January 1, 1999 to
August 12, 1999 and the nine month period ended September 30, 1998 is as
follows:
<TABLE>
<CAPTION>
The Company - The Predecessor - Combined
Consolidated ----------------------------------------------
Period From Period From Nine Month
August 13, 1999 to January 1, 1999 to Period Ended
September 30, 1999 August 12, 1999 September 30, 1998
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net loss $ (87,123) $ (114,913) $ (37,733)
Foreign currency translation adjustment 257 157 (766)
Minimum pension liability adjustment -- 2,491 --
--------------------- --------------------- ---------------------
Total comprehensive loss $ (86,866) $ (112,265) $ (38,499)
===================== ===================== =====================
</TABLE>
Other comprehensive loss in each of the periods above is net of $0 income tax
effects.
11
<PAGE> 12
The accumulated other comprehensive income (loss) balances are as follows:
<TABLE>
<CAPTION>
Foreign Currency Minimum
Translation Pension Liability Accumulated Other
Adjustment Adjustment Comprehensive Income (Loss)
--------------------- --------------------- ----------------------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ (1,191) $ (2,491) $ (3,682)
Current period change 414 2,491 2,905
--------------------- --------------------- ----------------------------
Balance, September 30, 1999 $ (777) $ -- $ (777)
===================== ===================== ============================
</TABLE>
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In preparation of the condensed consolidated/combined financial statements
included herein, the Company uses estimates for, among others, defined benefit
pension obligations, other postretirement benefit obligations, environmental
remediation and fair value adjustments related to the acquisition, all of which
are significant to the condensed consolidated/combined financial statements
taken as a whole. Changes in circumstances in the near term could have an impact
on these estimates, and the change in estimate could have a material effect on
the consolidated/combined financial statements.
NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and for Hedging Activities," ("SFAS
133"). This statement establishes accounting and reporting standards requiring
that every derivative instrument be recorded on the balance sheet as either an
asset or liability measured at fair value. SFAS 133 requires that changes in the
fair value of derivatives be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133, as amended, is effective for fiscal
years beginning after June 15, 2000, and cannot be applied retroactively. The
Company has not completed its evaluation of SFAS 133 and, accordingly, is unable
to determine what impact, if any, SFAS 133 will have on its financial
statements.
4. BUSINESS COMBINATIONS
On August 13, 1999, the Combination of Bar Technologies Inc., Republic
Engineered Steels, Inc., and the steelmaking and bar producing assets of the
USS/Kobe Steel Company was completed. The Combination occurred through a series
of mergers, asset transfers and related steps that resulted in the formation of
the Company. Blackstone and Veritas indirectly own approximately 51.5 percent of
the newly combined operations, while USX Corporation and Kobe Steel, Ltd. each
indirectly own approximately 15 percent of the newly combined operations. The
seamless pipe business of the USS/Kobe Steel Company in Lorain, Ohio was not
part of the Combination and will continue to operate as a joint venture of USX
Corporation and Kobe Steel, Ltd. In conjunction with the Combination, the
Company entered into a new credit facility and applied proceeds from borrowings
under this new credit facility, together with proceeds of its offering of the
senior secured notes and warrants, including warrants sold separately from the
senior secured notes concurrent with the Combination, and new equity
contributions, to refinance a substantial portion of the indebtedness of
Republic, RES Holding, Bar Tech and USS/Kobe. The combination of Bar Tech and
Republic is being accounted for as a common control merger like a pooling of
interests.
12
<PAGE> 13
Combined and separate results of Bar Tech and Republic during the periods
preceding the Combination, while under common control, were as follows:
<TABLE>
<CAPTION>
Bar Tech Republic Adjustment Combined
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Period from January 1, 1999
to August 12, 1999:
Net sales $ 152,494 $ 360,355 $ (38,284) $ 474,565
Net loss (25,279) (89,634) -- (114,913)
Nine months ended September 30, 1998:
Net sales $ 222,274 $ 53,213 $ (25) $ 275,462
Net loss (26,358) (5,299) (6,076) (37,733)
</TABLE>
The combined financial results presented above include adjustments made to
conform accounting policies of the two companies. The only adjustment impacting
net loss was the restatement of Republic's cost of goods sold to change the
inventory accounting policy from last-in, first-out (LIFO) to first-in,
first-out (FIFO). Sales from Bar Tech to Republic for the period from January 1,
1999 to August 12, 1999 and the nine month period ended September 30, 1998 were
$23,606 and $0, respectively, and sales from Republic to Bar Tech for the period
from January 1, 1999 to August 12, 1999 and the nine month period ended
September 30, 1998 were $14,678 and $25, respectively. The amount of
intercompany profit in inventory at the end of each period is not significant.
In connection with the combination of Bar Tech and Republic, the Company
recorded one-time charges for investment banking and professional fees in the
quarter ended September 30, 1999 of approximately $6,300. The transaction costs
related to the acquisition of USS/Kobe are included in the purchase price.
The Company also recorded one-time charges for call and tender offer premiums,
prepayment penalties and write-off of unamortized deferred financing costs
associated with the retirement of various borrowings of Bar Tech and Republic
refinanced in connection with the Combination during the quarter ended September
30, 1999 of approximately $23,300.
Blackstone and Veritas acquired control of Republic on September 8, 1998 for a
price of $7.25 per share of Republic common stock with the intent of combining
Bar Tech and Republic, subject to a refinancing of the combined companies' debt.
The purchase price totaled approximately $154,260, including transaction related
expenses and net of cash acquired of $4,041. RES Holding and its wholly owned
subsidiary, RES Acquisition were formed for the purpose of acquiring Republic.
The source of funds contributed to RES Acquisition consisted of (i) a capital
contribution of $95,455 by RES Holding representing proceeds from the issuance
of its common stock to Blackstone, Veritas and HVR Holdings, L.L.C. and (ii)
borrowings of approximately $65,046 under the RES Holding Facility. RES
Acquisition acquired control of Republic on September 8, 1998 and RES
Acquisition merged with and into Republic on September 21, 1998.
The acquisition of Republic has been accounted for as a purchase and, pursuant
to the provisions of SEC Staff Accounting Bulletin No. 54 ("SAB No. 54") and the
rules of pushdown accounting, the acquisition gave rise to a new basis of
accounting. The purchase price and related acquisition expenses exceeded the
fair value of net assets acquired by $72,557 and has been recognized as
goodwill, which is being amortized over 40 years. The results of Republic's
operations are included in the consolidated/combined financial statements from
its September 8, 1998 acquisition date.
The acquisition of USS/Kobe has also been accounted for using the purchase
method of accounting. The purchase price for USS/Kobe totaled approximately
$102.5 million, including transaction costs and net of cash acquired of $14.6
million. Consideration in the transaction included equity to the sellers valued
at approximately $83.7 million and seller debt assumed of $23.7 million. Under
purchase accounting, the total purchase cost is allocated to the assets acquired
and liabilities assumed of USS/Kobe based on their respective fair values as of
August 12, 1999, based on valuations and other studies that are not yet
finalized. For the combination of USS/Kobe into Republic Technologies, a
preliminary allocation of the purchase price of $101.0 million has been made to
reduce property, plant and equipment for the entire amount that the historical
net equity of USS/Kobe exceeds the estimated purchase price (i.e., purchase
discount). The actual allocation of purchase price and the resulting effect on
income from operations may differ significantly from these preliminary
estimates.
13
<PAGE> 14
The purchase price has been allocated to the assets purchased and liabilities
assumed based upon the fair values on the date of the acquisition as follows:
<TABLE>
<CAPTION>
Republic USS/Kobe
--------------------- ---------------------
<S> <C>
Purchase price:
Cash consideration $ 143,901
Estimated fair value of equity consideration $ 83,700
Additional seller debt assumed 23,700
Acquisition fees and expenses 14,401 9,700
--------------------- ---------------------
Total purchase price 158,302 117,100
Book value of net assets acquired 85,100 218,100
--------------------- ---------------------
Excess purchase price over (discount from) book value
of net assets acquired 73,202 (101,000)
Allocation of purchase price:
(Increase) decrease in property, plant and equipment (6,729) 101,000
Increase in other intangible assets (39,352)
Increase in defined benefit pension obligation 41,357
Decrease in other postretirement benefits (45,344)
Increase in accrued expenses 10,848
Increase in inventory (16,980)
Decrease in deferred tax asset 54,829
Other, net 726
--------------------- ---------------------
Goodwill $ 72,557 $ --
===================== =====================
5. INVENTORIES
The components of inventories are as follows:
September 30, 1999 December 31, 1998
------------------------- ------------------------
Raw materials $ 42,222 $ 28,506
Work-in-process 82,307 65,417
Finished goods 151,068 109,321
------------------------- ------------------------
Total $ 275,597 $ 203,244
========================= ========================
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
September 30, 1999 December 31, 1998
------------------------- ------------------------
Goodwill $ 85,416 $ 12,859
Excess purchase price over net assets acquired -- 147,652
Patented and unpatented technology 55,300 --
Intangible pension asset 18,673 --
Other intangible assets -- 171
Deferred loan and bond fees 33,098 23,151
------------------------- ------------------------
192,487 183,833
Less accumulated amortization (8,272) (10,456)
------------------------- ------------------------
Total $ 184,215 $ 173,377
========================= ========================
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
7. LONG-TERM DEBT
Long-term debt of the Company consists of the following:
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Republic Technologies International, LLC:
13 3/4% Senior Secured Notes, due 2009 $ 425,000
Former Republic:
9% Solid Waste Revenue Bonds, Series 1996, due June 2021 53,700 $ 53,700
8 1/4% Solid Waste Revenue Bonds, Series 1994, due October 1, 2014 20,200 20,200
9 7/8% First Mortgage Notes, due December 15, 2001 -- 203,615
Republic Revolving Credit Agreement -- 13,700
Other 482 2,306
Former Bar Tech:
13 1/2% Senior Secured Notes, due April 1, 2001 -- 91,609
Marine Midland Term Loan, interest rate at Prime or LIBOR plus 1.0%,
due March 1, 2003 -- 6,929
RDC Loan, interest rate at 7.75%, due July 1, 2004 -- 411
Economic Development Partnership ("EDP I"), interest at 3.0%, due
October 1, 2009 5,707 5,707
Sunny Day Fund I ( "SDF I "), interest rate at 3.0%, due October 1, 2009 -- 6,491
Community Development Block Grant Program ("CDBG"), interest rate at
3.0%, due July 1, 2010 630 690
Economic Development Partnership ( "EDP II "), interest rate at 3.0%, due
July 1, 2010 1,300 1,300
Housing and Urban Development 108 ( "HUD ") Bonds, interest rates
between 6.6% and 8.2%, due on various dates from August 1, 1999 to
September 26, 2003 4,500 5,750
Pennsylvania Industrial Development Authority Note ( "PIDA I "), interest
rate at 2.0%, due October 1, 2009 -- 1,646
Pennsylvania Industrial Development Authority Note ("PIDA II"), interest
rate at 3.0%, due March 1, 2011 -- 1,797
Bethlehem Subordinated Note, interest rate at 7.0%, due September 26, 2002 -- 5,500
Business Infrastructure Development ("BID") Program, interest rate at
3.0%, due April 1, 2001 2,300 2,500
Economic Development Partnership ( "EDP III "), interest rate at 3.0%, due
December 1, 2007 3,000 3,000
Industrial Revenue Bond ( "IRB "), interest rate is variable, calculated
weekly, representing minimum rate required to sell bonds in a secondary
market, due December 1, 2018 3,600 3,600
Former USS/Kobe:
Environmental Bonds:
1984 Series, interest due monthly at a variable rate based on the
average
of thirty-day yield evaluations at par of not less than twenty 9,000
issuers of
tax-exempt securities, principal due December 2001
1995 Series, variable rate tax-exempt securities, principal due November
2015 4,745
----------------- -----------------
534,164 430,451
Less original issue discount 5,439 4,163
Less discount on warrants 45,632 --
Less current maturities 2,149 3,805
================= =================
Long-term debt $ 480,944 $ 422,483
================= =================
</TABLE>
15
<PAGE> 16
13 3/4% SENIOR SECURED NOTES
On August 13, 1999, the Company and its subsidiary, RTI Capital Corp., co-issued
senior secured obligations amounting to $425 million aggregate principal amount
maturing on July 15, 2009 ("Senior Secured Notes") in a private offering.
Interest on the Senior Secured Notes is payable semi-annually on each January 15
and July 15, commencing January 15, 2000, to the holders of record of Senior
Secured Notes at the close of business on January 1 and July 1 immediately
preceding such interest payment date.
The Senior Secured Notes are redeemable, in whole or in part, at the option of
the issuers, at any time on or after July 15, 2004, at the redemption prices,
which are expressed as percentages of principal amount, set forth below, plus
accrued and unpaid interest and liquidated damages, if any, to the redemption
date, if redeemed during the 12-month period beginning on the years indicated
below:
YEAR PERCENTAGE
2004 106.875%
2005 105.156%
2006 103.438%
2007 101.719%
2008 and thereafter 100.000%
In addition, at any time and from time to time prior to July 15, 2002, the
issuers may, at their option, following one or more Public Equity Offerings (as
defined in the indenture related to the Senior Secured Notes (the "Indenture"))
redeem up to an aggregate of 35% of the principal amount of notes originally
issued from the holders, on a pro rata basis, at a redemption price equal to
113.750% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the date of redemption; provided at least 65%
aggregate principal amount of Senior Secured Notes would remain outstanding
immediately after giving effect to any such redemption; provided, further, that
if the Public Equity Offering is by Republic Technologies International
Holdings, LLC, the Company or any other direct or indirect parent company of the
Company, the net proceeds thereof shall have been contributed to the Company or
used to buy Capital Stock (other than Disqualified Capital Stock) (as such terms
are defined in the Indenture) of the Company on or prior to the date of
redemption.
The Senior Secured Notes are initially secured by, subject to exceptions and
limitations, (1) a first priority lien on, and security interest in,
substantially all of the real and personal properties of the Company and its
restricted subsidiaries, other than real and personal property located at the
CAST-ROLL(TM) and Cartersville, Georgia facilities and inventory, accounts
receivable, intellectual property and related assets and (2) a first priority
lien, shared on an equal and ratable basis with the lenders of the Company's new
credit facility, on the Company's equity interests and its restricted
subsidiaries. Collateral is subject to release without substitution under a
number of circumstances. The Senior Secured Notes contain affirmative and
negative covenants including provisions for restrictions on additional
borrowings, certain investments, certain payments, sale or disposition of
assets, payment of dividends and change of control provisions.
FORMER REPUBLIC LOAN AGREEMENTS
On June 1, 1996, Republic obtained $53.7 million of financing through the
issuance of 9% Solid Waste Revenue Bonds, Series 1996, due June 1, 2021 in
connection with the solid waste disposal facilities installed at its Canton
facility. These bonds were issued in addition to the Solid Waste Revenue, Series
1994 noted below, to assist in financing the facilities. As of September 30,
1999 and December 31, 1998, Republic had available $347 thousand and $337
thousand, respectively, of the $53.7 million which is classified as long-term
restricted cash in the accompanying consolidated/combined balance sheets.
On October 28, 1994, Republic obtained $20.2 million of financing through the
issuance of 8 1/4% Solid Waste Revenue Bonds, Series 1994, due October 1, 2014
in connection with the solid waste disposal facilities installed at the Canton
facility.
On December 15, 1993, Republic issued $200 million aggregate principal amount of
9 7/8% First Mortgage Notes due December 15, 2001 ("First Mortgage Notes") in an
underwritten public offering. The First Mortgage Notes were redeemable, in whole
or in part, at the option of Republic, on or after December 15, 1999 at
specified premiums set forth therein which declined over three years. The First
Mortgage Notes were secured by a mortgage on substantially all of Republic's
property, plant and equipment as of December 15, 1993. The proceeds from the
First Mortgage Notes were used in part to repay the balance outstanding under
the then existing revolving credit and term loan agreement and Republic's
unsecured subordinated debentures held by LTV Steel Company, Inc. ("LTV Steel").
16
<PAGE> 17
As a result of the acquisition of Republic, Republic was required by the terms
of the indenture for the First Mortgage Notes to offer to purchase any and all
of the First Mortgage Notes at a purchase price of $1,010 per $1,000 principal
amount plus accrued and unpaid interest (the "Change of Control Offer"). Such
premium has been recorded as a fair value adjustment to the liabilities assumed
in the acquisition of Republic with a corresponding increase to the excess
purchase price over net assets acquired. On October 5, 1998, Republic commenced
the Change of Control Offer, which expired on November 5, 1998. Approximately
$28.1 million principal amount of First Mortgage Notes was tendered with the
Change of Control Offer. The purchase of the tender notes was assigned to
affiliates of the Lenders (as defined below).
On October 29, 1998, Republic commenced a new offer to purchase any and all of
the outstanding First Mortgage Notes at a purchase price of $1,042.30 per $1,000
principal amount plus accrued and unpaid interest (the "Offer"). The Offer
expired on June 30, 1999. Republic accrued the offer premium over the period of
the Offer. For the purpose of funding the Change of Control Offer and the Offer,
Republic entered into an additional senior credit facility (the "Bridge
Facility") with Chase, DLJ Bridge Finance, Inc. and BankBoston N. A. (the
"Lenders") which provided for up to $208.5 million of borrowings. Republic
utilized the Bridge Facility to purchase and retire all of the First Mortgage
Notes on June 30, 1999. The Bridge Facility was then repaid with proceeds of the
financing completed concurrent with the Combination.
On December 21, 1993, Republic entered into a $90 million revolving credit
facility, which had a four-year term expiring in December 1997. Effective April
25, 1997, Republic amended and restated this $90 million revolving credit
facility ("Republic Revolving Credit Agreement"). The amended and restated
Republic Revolving Credit Agreement permitted borrowings up to $115 million and
was secured by Republic's receivables, inventories, stock of a subsidiary,
short-term investments and certain intangible assets.
The Republic Revolving Credit Agreement, as amended in November 1998, provided
up to $50 million for letters of credit. Borrowings under the Republic Revolving
Credit Agreement bore interest at a per annum rate equal to, at Republic's
option, (i) the higher of the base rate of BankBoston and 1/2% above the Federal
Funds effective rate plus 1/4%; or (ii) LIBOR plus 2 1/4%. The borrowing base
under the Republic Revolving Credit Agreement was the sum of 55% of eligible
inventory (as defined) up to a maximum of $75 million and 85 percent of eligible
accounts receivable (as defined). Fees of 2 1/2% per annum on the maximum
drawing amount of each standby or documentary letter of credit were payable on
the date of issuance of such letter of credit.
On May 6, 1999, the Republic Revolving Credit Agreement was once again amended
(the "Amended Republic Agreement") to reflect the formation of Republic
Technologies International Marketing LLC ("Marketing JV"), a marketing joint
venture owned in equal proportions by Republic and Bar Tech. Under the Amended
Republic Agreement, the Marketing JV became a co-borrower and all borrowings
were secured additionally by the receivables of the Marketing JV. Under the
terms of the Marketing JV agreement, Republic purchased all the receivables of
the Marketing JV on a discounted basis as sales were made to customers. The
Amended Republic Agreement provided a temporary increase to permitted borrowings
from $115 million to $135 million until December 31, 1999. The Amended Republic
Agreement also provided up to $50 million for letters of credit. Interest rates
on borrowings under the Amended Republic Agreement were increased for base rate
loans to base rate plus 3/4% and for LIBOR rate plus 2 3/4%. Fees for standby or
documentary letters of credit were increased to 2 3/4%. As of September 30, 1999
and December 31, 1998, there were no outstanding letters of credit.
As of December 31, 1998, amounts outstanding under the Republic Revolving Credit
Agreement were $13.7 million.
The Republic Revolving Credit Agreement was extinguished on August 13, 1999 with
proceeds from the financing completed concurrent with the Combination. The
Marketing JV was terminated as a result of the Combination.
FORMER BAR TECH SENIOR SECURED NOTES
Bar Tech's 13 1/2% Senior Secured Notes due April 1, 2001, consisting of $91.6
million in aggregate principal amount at December 31, 1998 (the "Bar Tech Senior
Secured Notes"), were fully and unconditionally guaranteed on a senior basis,
jointly and severally, by Bar Tech's wholly-owned subsidiary, BLI and its
wholly-owned subsidiary, CDSC. The subsidiary guarantors comprised all of the
direct and indirect subsidiaries of Bar Tech. In connection with the
Combination, Bar Tech initiated a redemption of the Bar Tech Senior Secured
Notes at a purchase price of 106.75% of their principal amount, plus accrued and
unpaid interest. The Bar Tech Senior Secured Notes were defeased concurrent with
the Combination pending completion of the redemption. Funds for this defeasance
were obtained from proceeds from the financing completed concurrent with the
Combination. The redemption of the Bar Tech Senior Secured Notes was completed
on September 13, 1999.
17
<PAGE> 18
In connection with the Bar Tech Senior Secured Notes, warrants were issued which
entitled the holders thereof to acquire an aggregate of 91,609 shares of Class A
Common Stock. The warrants are exercisable at a price of $0.01 per share and, as
a result of the completion of the Combination, are exercisable to purchase
shares of Class A common stock of Republic Technologies International, Inc., the
indirect parent of the Company. The warrants become exercisable on April 1, 2000
and will expire on April 1, 2001.
BAR TECH ECONOMIC DEVELOPMENT FINANCING
In connection with the acquisition of the assets of The Bethlehem Steel Company
("Bethlehem") Bar, Rod and Wire Division and its original modernization and
expansion plan, Bar Tech entered into loan agreements with lenders in
Pennsylvania and New York to procure a portion of the financing for the
transaction.
PENNSYLVANIA
Bar Tech entered into the Master Agreement with the Commonwealth of Pennsylvania
and various of its agencies (collectively, the "Commonwealth") on July 18, 1994.
Pursuant to the Master Agreement, Bar Tech entered into loan agreements with the
Commonwealth, through its Department of Commerce and Department of Community
Affairs. The total amount committed to Bar Tech by the Commonwealth pursuant to
the Master Agreement was $33.0 million. The loans have been made through the
Sunny Day Fund ("SDF"), the Pennsylvania Industrial Development Authority
("PIDA"), the Business Infrastructure Development Program ("BID"), the Economic
Development Partnership ("EDP") and the Community Development Block Grant
Program ("CDBG"). (The loans governed by the Master Agreement are collectively
referred to herein as the "Commonwealth Loans").
Bar Tech has obtained approval from the Pennsylvania Industrial Development
Authority regarding the deferral of principal on its PIDA and BID loans, and
principal and interest deferral on its EDP loans. Bar Tech must resume principal
payments related to PIDA and BID loans and principal and interest payments
related to EDP loans beginning January 2000. All deferred loans are required to
be amortized over their original maturity schedule with no deferral of final
maturity.
As of September 30, 1999 and December 31, 1998, $12.9 million and $23.1 million,
respectively, in aggregate principal amount of Commonwealth Loans were
outstanding.
NEW YORK
JDA Guaranteed Marine Midland Term Loan--Bar Tech was party to a Loan and Use
Agreement, dated September 21, 1994, with Marine Midland Bank ("Marine Midland")
(the "Marine Midland Loan"), whereby Marine Midland loaned $10.0 million to Bar
Tech for use in connection with the acquisition of Lackawanna, New York real
estate from Bethlehem. The Marine Midland Loan was guaranteed by the New York
Job Development Authority ("JDA"). Interest on the Marine Midland Loan was prime
rate, or the LIBOR rate, as determined by Bar Tech. The Marine Midland Loan was
extinguished with proceeds from the financing completed concurrent with the
Combination.
18
<PAGE> 19
RDC Loan--Bar Tech was party to a Loan Agreement with the Buffalo and Erie
County Regional Development Corporation ("RDC") providing for a loan in the
amount of $0.5 million to be used by Bar Tech for working capital needs (the
"RDC Loan"). The RDC Loan had an interest rate of 7.75% per annum until July 1,
1999, and had an adjustable rate thereafter. The RDC Loan was secured by a
Security Agreement, which granted RDC a security interest in equipment,
fixtures, inventory, accounts receivable, chattel paper and general intangibles.
The RDC Loan was extinguished with proceeds from the financing completed
concurrent with the Combination.
BETHLEHEM SUBORDINATED LOAN AGREEMENT
Bar Tech entered into $5.5 million Subordinated Loan Agreement, dated September
21, 1994, with Bethlehem (the "Bethlehem Loan"). The terms of the agreement
provide for three equal installments on the first day of October in each of the
years 2000, 2001 and 2002 at a rate of 7.0% per annum and is due on October 1,
2002. The Bethlehem Loan was secured by a subordinated security interest in
certain real and personal property of Bar Tech and any and all proceeds
therefrom. The Bethlehem Loan was extinguished with proceeds from the financing
completed concurrent with the Combination.
INDUSTRIAL REVENUE BONDS
In December 1988, the Development Authority of Cartersville, Georgia issued $3.6
million in aggregate principal amount of its tax exempt industrial revenue
bonds, or "IRBs," the proceeds of which were loaned to Bar Tech's Bliss &
Laughlin subsidiary and used to partially fund the construction and equipping of
Bliss & Laughlin's Cartersville, Georgia facility. The Cartersville IRBs bear
interest at a rate equal to the minimum rate of interest which, in the opinion
of the remarketing agent for the Cartersville IRBs, would be necessary to sell
Cartersville IRBs in the secondary market. The interest rates paid on the
Cartersville IRBs varied from 3.26% to 4.75% during fiscal 1998 and was 4.20% at
September 30, 1999. Principal payments of $300,000 are due on the Cartersville
IRBs on each December 1 beginning in 2009 and continuing through 2012.
Thereafter, payments of $400,000 are due on each December 1 until the final
payment on December 1, 2018. The Cartersville IRBs are secured by Bliss &
Laughlin's Cartersville, Georgia facility and the equipment located at the
facility. As of September 30, 1999, $3.6 million of indebtedness was outstanding
under the Cartersville IRBs.
USS/KOBE ENVIRONMENTAL BONDS
1984 EIRBs
In December 1984, the Ohio Water Development Authority issued $9 million in
aggregate principal amount of tax exempt variable rate demand environmental
improvement revenue bonds, or "1984 EIRBs," the proceeds of which were loaned to
USX Corporation and used to finance the cost of pollution control equipment at
the Lorain, Ohio facility, which was contributed by USX Corporation to USS/Kobe
Steel Company in 1989. The 1984 EIRBs are special obligations of the State of
Ohio exempt from various forms of federal, state and local income taxation and
are therefore subject to mandatory redemption upon the occurrence of a
determination of taxability, and are further subject to optional and mandatory
redemption and tender prior to maturity pursuant to the terms of the trust
indenture agreement concerning the 1984 EIRBs.
The interest rates paid on the 1984 EIRBs averaged 3.68% during calendar year
1998 and was 3.37% at September 30, 1999. The 1984 EIRBs mature on December 1,
2001. As of September 30, 1999, $9.0 million of indebtedness was outstanding
under the 1984 EIRBs.
In connection with the original issuance of the 1984 EIRBs, PNC Bank, N.A.
issued an irrevocable, direct-pay letter of credit to secure payment of the
principal of, interest on and the purchase price of the 1984 EIRBs, in an amount
equal to the principal of the 1984 EIRBs plus an amount equal to 75 days of
interest on the 1984 EIRBs at a rate of 15% per year. Draws on the letter of
credit are secured by a first priority lien on bonds purchased as a result of
the draw pursuant to the terms of the reimbursement agreement and a pledge and
security agreement entered into between PNC and USX Corporation.
In connection with the consummation of the Combination, the Company agreed to
pay the debt service on the 1984 EIRBs, including remarketing fees and amounts
due under the PNC letter of credit. The Company may need to make payments in
respect of the 1984 EIRBs earlier than scheduled if USX Corporation terminates
the PNC letter of credit or otherwise makes early payment in respect of the 1984
EIRBs.
19
<PAGE> 20
1995 EIRBs
In November 1995, the Ohio Air Quality Development Authority issued $10.16
million of its tax exempt variable rate environmental improvement revenue bonds,
or "1995 EIRBs," the proceeds of which were loaned to USX Corporation for the
purpose, in part, of refinancing its outstanding $4.745 million Ohio Air Quality
Development Authority Floating Rate Environmental Improvement Revenue Bonds,
Series B. These Series B bonds had been issued in 1980 to finance the cost of
pollution control equipment at the Lorain facility. The 1995 EIRBs are special
obligations of the State of Ohio exempt from various forms of federal, state and
local income taxation and are therefore subject to mandatory redemption upon the
occurrence of a determination of taxability, and are further subject to optional
and mandatory redemption and tender prior to maturity pursuant to the terms of
the trust indenture agreement concerning the 1995 EIRBs.
The interest rates paid on the 1995 EIRBs averaged 3.54% during calendar year
1998 and was 3.36% at September 30, 1999. The 1995 EIRBs mature on November 1,
2015. As of September 30, 1999, $4.7 million of indebtedness was outstanding
under the 1995 EIRBs.
The Wachovia Bank of North Carolina, N.A. has issued an irrevocable, direct-pay
letter of credit to secure payment of the principal of, interest on and the
purchase price of the 1995 EIRBs, in a stated amount equal to the principal
amount of the 1995 EIRBs plus an amount equal to 210 days of interest on the
1995 EIRBs at a rate of 12% per year. Draws on the letter of credit are secured
by a first priority lien on bonds purchased as a result of the draw pursuant to
the terms of the reimbursement agreement and a pledge and security agreement
entered into between Wachovia and USX Corporation.
In connection with the consummation of the Combination, the Company agreed to
pay 46.7% of the debt service on the 1995 EIRBs, including 46.7% of the
remarketing fees and amounts due under the Wachovia letter of credit. The
Company may need to make payments in respect of the 1995 EIRBs earlier than
scheduled if USX Corporation terminates the Wachovia letter of credit or
otherwise makes early payment in respect of the 1995 EIRBs.
8. REVOLVING CREDIT FACILITIES
In connection with the Combination, the Company entered into a new senior
revolving credit facility ("New Revolver") with BankBoston, N.A. ("BankBoston"),
as administrative agent, and other lenders. The New Revolver is for a total
principal amount of up to $425 million. The amount available at any time is
limited by a borrowing base. The borrowing base equals 60% of eligible inventory
subject to a maximum; plus 85% of eligible accounts receivable; plus the lesser
of (a) 67% of the appraised liquidation in place of the Cast- Roll(TM) facility
plus the appraised value of the related real estate in Canton, Ohio, provided
that no downward adjustment will be made prior to March 31, 2001 and, (b) $125
million, minus the product of $4.5 million and the number of quarters elapsed
beginning with the quarter ended December 31, 2000; minus a reserve of between
$35 million and $50 million, which will be adjusted based on the amount of
undrawn available amounts under the facility. There were $300.2 million of
borrowings under the New Revolver outstanding at September 30, 1999. Amounts
available under the New Revolver at September 30, 1999 were $107.8 million.
Borrowings under the New Revolver bear interest, at the Company's option, of
either: a base rate used by BankBoston, plus an applicable margin; or a
eurodollar rate on deposits for one, two, three or six month periods, plus the
applicable margin. The applicable margin on base rate loans is 1.25% and on
eurodollar loans is 3.25%. The applicable margin on base rate and eurodollar
loans may be increased by .25% under specified circumstances.
The Company must also pay a commitment fee on the unused commitments under the
New Revolver facility equal to 0.50% per annum, payable monthly in arrears.
The New Revolver contains covenants that among other things, restrict the
Company's ability to incur additional indebtedness or guarantee the obligations
of others, change its line of business, merge, consolidate and acquire or sell
assets or stock, pay dividends, or prepay or amend the notes or any of its
subordinated indebtedness.
On September 8, 1998, the acquisition by RES Acquisition of Republic was
partially funded with short-term borrowings of approximately $65.0 million (the
"RES Holding Facility") under the Credit Agreement dated September 8, 1998
between RES Holding and The Chase Manhattan Bank ("Chase"), as administrative
agent. The maturity of the RES Holding Facility was June 8, 1999, however, the
agreement was extended to September 30, 1999. This debt was refinanced with
proceeds of the financing completed concurrent with the Combination.
20
<PAGE> 21
Bar Tech had a revolving credit agreement with a group of banks with Chase as
agent which originally provided Bar Tech with borrowings in an aggregate
principal amount of up to $90.0 million, of which $5.4 million was in the form
of letters of credit. This revolving credit agreement was subsequently amended
in September 1997 to provide for the addition of a new revolving sub-facility
("Sub-Facility") and amended certain portions of the original revolving credit
agreement. The Sub-Facility component of the amended agreement provided Bar Tech
with up to $15.0 million of additional borrowing capacity based on a higher
receivable and inventory advance rate than in the revolving credit agreement.
On May 5, 1999, Bar Tech further amended its revolving credit agreement ("Bar
Tech Amended Agreement") in conjunction with the formation of the Marketing JV.
The Bar Tech Amended Agreement provided for a reduction in Bar Tech's borrowing
capacity to $77.0 million, of which $5.3 million was in the form of letters of
credit. In addition, amounts available under Bar Tech's Sub-Facility were
reduced to $2.0 million with this Bar Tech Amended Agreement. By July 31, 1999,
amounts available under the Bar Tech Amended Agreement were further reduced to
$71.5 million and amounts were no longer available under Bar Tech's
Sub-Facility. The maturity date of the Bar Tech Amended Agreement remained April
2, 2000 and is secured by certain assets and stock of Bar Tech.
Borrowings under the Bar Tech Amended Agreement bear interest at a rate per
annum equal to, at Bar Tech's option, either a Prime rate plus 2.0% or adjusted
LIBOR plus 3.0%, subject to upward adjustment in certain circumstances.
Sub-Facility borrowings bear interest at a rate per annum equal to, at Bar
Tech's option, either a Prime rate plus 3.5% or LIBOR plus 4.5%. Borrowings
outstanding under the Bar Tech Amended Agreement including the Sub-Facility were
$79.0 million at December 31, 1998. Weighted-average interest rates on
borrowings under the Bar Tech Amended Agreement and the Sub-Facility were 8.79%
and 11.50%, respectively, at December 31, 1998. The Bar Tech Amended Agreement
was extinguished with proceeds of the financing completed concurrent with the
Combination.
9. DEFINED CONTRIBUTION BENEFIT PLANS
The Company has defined contribution retirement plans that cover substantially
all employees. Company contributions to the plans are based on age and
compensation. The Company funds retirement plan contributions as accrued.
Republic had profit sharing plans covering all of its employees, excluding
officers. Amounts provided to the profit sharing pool were based on percentages
of the consolidated excess cash flows of the Company, as defined. There was no
expense relating to these plans for any of the periods presented.
In connection with the defined benefit plan improvements during the term of the
new labor agreement, the Company's contributions to the existing defined
contribution plans covering employees at former Republic facilities, the former
Bliss & Laughlin Harvey, Illinois facility and former Bar Tech facilities will
be discontinued and the defined contribution plans may be merged into the
defined benefit plan (see Note 10).
21
<PAGE> 22
10. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS
Due to the interim mature of the consolidated/combined financial statements and
the different fiscal years of the three predecessor companies, certain
information related to the change in benefit obligation, change in plan assets,
funded status and measurement assumptions are not available for the interim
periods presented. Complete disclosures will be provided in the Company's 1999
year-end financial statements. The amounts recognized in the
consolidated/combined balance sheets related to the Company's pension and
postretirement plans are as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
------------------------------------- -------------------------------------
September 30, December 31, September 30, December 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
AMOUNTS RECOGNIZED IN THE STATEMENT
OF FINANCIAL POSITION CONSIST OF:
Net amount recognized $ 55,038 $ 66,849 $ 173,240 $ 95,712
Adjustment required to recognize
minimum liability 18,673 2,491 -- --
------------------ ------------------ ------------------ ------------------
Accrued benefit costs $ 73,711 $ 69,340 $ 173,240 $ 95,712
================== ================== ================== ==================
</TABLE>
Net periodic pension costs for the period from August 13, 1999 to September 30,
1999, the period from July 1, 1999 to August 12, 1999, the period from January
1, 1999 to August 12, 1999, and the nine months ended September 30, 1998 were
$1.4 million, $0.7 million, $5.3 million and $0.7 million, respectively.
Net periodic post retirement benefit costs for the period from August 13, 1999
to September 30, 1999, the period from July 1, 1999 to August 12, 1999, the
period from January 1, 1999 to August 12, 1999, and the nine months ended
September 30, 1998 were $2.5 million, $0.6 million, $3.9 million, and $0.5
million, respectively.
22
<PAGE> 23
In connection with the Republic acquisition in September 1998, a new Master
Collective Bargaining Agreement and settlement agreement (collectively, the
"Master CBA") covering all of the former Republic and Bar Tech facilities with
employees represented by the United Steelworkers union (the "USWA") were entered
into with the USWA. The Master CBA replaced the existing collective bargaining
agreements with the USWA, other than selected plant-specific agreements. In
connection with the Combination, the scope of the Master CBA was extended to
cover the former USS/Kobe Lorain, Ohio facility. The Master CBA expires on
October 31, 2003. The Master CBA provides for improvements in the existing
defined benefit pension plans covering employees at former Republic facilities,
former USS/Kobe facilities and the former Bliss & Laughlin Harvey, Illinois
facility, and the creation of a defined benefit pension plan obligation covering
employees at former Bar Tech facilities. The existing defined benefit pension
plans may be consolidated into one defined benefit pension plan in the future,
which will contain terms found in traditional steel industry defined benefit
pension plans.
The Master CBA allows the Company to reduce the number of job classifications at
all USWA-covered facilities to five from over 34 at certain facilities thereby
permitting employees to be assigned a wider range of responsibilities.
The Master CBA requires the Company to offer Early Retirement Buyouts ("ERB's")
to at least 1,000 employees and permits the Company to offer a Voluntary
Severance Plan ("VSP"). The purpose of these programs is to reduce the hourly
workforce by a net reduction of over 1,900 hourly employees over four years.
These programs are substantially voluntary in nature. Accordingly, the costs
associated with these workforce reductions are being recognized as charges to
operations as the offers for ERB's and VSP's are accepted by the employees and
intended to be awarded by the Company. Through September 30, 1999, 541 voluntary
ERB packages were accepted. As such, the Company has recorded $71.4 million of
workforce reduction charges to date for early retirement benefits, including
pension and other postretirement obligations and special termination payments.
Under the terms of Master CBA, if the ERB's and VSP's do not achieve targeted
headcount reductions, the Company will have the flexibility to reduce the hourly
workforce by approximately 300 employees in addition to the number of accepted
ERB's and VSP's. Pursuant to the Master CBA, USWA represented employees will be
eligible for Supplemental Unemployment Benefits (SUB) and the continuation of
certain health insurance benefits.
The following is a general description of the Company and its predecessors'
defined benefit plans.
REPUBLIC
The Company (formerly Republic) maintains a defined benefit "floor offset" plan,
which covers all former Republic USWA employees. The plan, when combined with
benefits from the Company's (formerly Republic) defined contribution pension
plan and benefits from an LTV Steel Defined Benefit Pension Plan, will provide a
minimum level of pension benefits for USWA employees. Benefits are based on a
combination of employees' age and years of service. The Company's policy is to
fund this plan based on legal requirements and tax considerations.
23
<PAGE> 24
Republic entered into a memorandum of understanding with the Pension Benefit
Guarantee Corporation (the "PBGC") on November 2, 1998, pursuant to which (1)
the PBGC agreed to forebear from instituting proceedings to terminate the USWA
Defined Benefit Plan as a result of the acquisition of Republic or the
prospective combination with Bar Tech, (2) in January 1999, Republic funded the
pension plan with an approximate $27,000 initial contribution and (3) Republic
made an additional contribution to such pension plan in the amount of $20,000 on
July 1, 1999. Additional quarterly contributions will be made by the Company
commencing October 1, 1999 in accordance with the following schedule: $7,500 per
quarter for the first four payments, $7,600 per quarter for the next four
payments, $9,100 per quarter for the next four payments and $8,500 per quarter
for the final four payments. Of the Company's aggregate pension obligation
relating to these contributions, $30,100 was classified as a current liability
and $33,013 was classified as a long-term liability in the accompanying
consolidated balance sheet as of September 30, 1999.
The Company (formerly Republic) also sponsors postretirement plans for health
care and life insurance that cover most full-time employees. The plans pay
stated percentages of most necessary medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Hourly employees become eligible for benefits after
completing 15 years of service and reaching age 60. Salary employees become
eligible for benefits if they retire after reaching age 65.
BAR TECH
BLI maintains defined benefit pension plans covering substantially all hourly
employees of its Harvey, Illinois and Medina, Ohio plants. Employees at the
Batavia, Illinois and Cartersville, Georgia plants are not covered. Benefits are
based on years of service and employee's age at termination. CDSC maintains
pension plans covering substantially all employees. Benefits for the CDSC
salaried employees' plan are based on an average salary for the five most recent
years prior to retirement. Benefits for the CDSC bargaining unit employees' plan
are based on years of service. The Company's policy is to fund pension cost in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974 in the United States and local regulations in Canada.
BLI and CDSC also sponsor postretirement plans for health care and life
insurance that cover most full-time employees. The plans pay stated percentages
of most necessary medical expenses incurred by retirees, after subtracting
payments by Medicare or other providers and after a stated deductible has been
met. Participants become eligible for benefits if they retire from BLI after
reaching age 55 with 10 or more years of service.
USS/KOBE
The Company (formerly USS/Kobe) sponsors two noncontributory defined benefit
plans covering substantially all former USS/Kobe employees. Benefits under these
plans are based upon years of service and final average pensionable earnings, or
a minimum benefit based upon years of service, whichever is greater. The funding
policy for these defined benefit plans provides that payment to the pension
trusts shall be equal to the minimum funding requirements of the Employee
Retirement Income Security Act of 1974 plus such additional amounts as may be
approved from time to time. Assets held by the plans are invested primarily in
corporate equity and debt securities and interest bearing cash accounts. In
addition, pension benefits from USS/Kobe's two defined contribution plans, which
cover participating employees, are based upon years of service and career
earnings.
In connection with the Combination, the Company agreed with the Pension Benefit
Guaranty Corporation to maintain a specified level of funding for the USS/Kobe
Union Eligible Pension Plan, a defined benefit plan for union employees, based
on statutory funding requirements. The agreement with the Pension Benefit
Guaranty Corporation with respect to this plan contemplates that contributions
will be made as follows: for the year 2000, an amount necessary to avoid an
accumulated funding deficiency plus $4 million; for 2001, an amount so that the
December 31, 2001 credit balance equals that of December 31, 2000 with interest
plus $2 million; for 2002, an amount so that the December 31, 2002 credit
balance equals that of December 2001 with interest plus $2 million; for 2003, an
amount so that the December 31, 2003 credit balance equals that of December 31,
2002 with interest plus $2 million. The agreement with the Pension Benefit
Guaranty Corporation further contemplates that, beginning with 2004, the Company
will make contributions to maintain the December 31, 2003 credit balance with
interest. As security for such obligation, the Company has provided the Pension
Benefit Guaranty Corporation with a $5 million letter of credit. The Company
currently estimates that approximately $53.6 million of fundings will be
required in connection with these obligations.
24
<PAGE> 25
11. INCOME TAXES
The Company is a limited liability company that will be treated as a partnership
for income tax purposes and accordingly is not an income taxpaying entity.
However, pursuant to the limited liability company agreement, RTI's parent will
be required to make cash distributions to its members to the extent necessary to
satisfy tax obligations regarding members' investment in RTI. To the extent
RTI's parent is required to make these tax distributions, the Company will be
required to make equivalent cash distributions to its parent. However, we
believe that certain of RTI's parent's members have net operating loss
carryforwards which may be available to offset a significant portion of their
taxable income attributable to their investment in the Company and reduce but
not eliminate, the need for tax distributions. Use of these net operating losses
is subject to various limitations and uncertainties and accordingly, the Company
cannot give any assurances that these net operating loss carryforwards will
reduce the need for tax distributions or that they will not be otherwise
utilized.
The provision for income taxes included in the accompanying
consolidated/combined statements of operations for all periods presented
represents a provision for foreign income taxes. Prior to the Combination, a
benefit for domestic income taxes is not included in the accompanying
consolidated/combined statements of operations since the Company's net deferred
tax assets were entirely offset by valuation allowances.
12. SEGMENT INFORMATION
The Company operates in three reportable segments: hot-rolled, cold-finished and
specialty steels. As discussed previously in Note 1, the Company intends to sell
its specialty steel division and accordingly, the accompanying
consolidated/combined financial statements reflect that division as a
discontinued operation in accordance with Accounting Principles Board Opinion
No. 30. As such the following tables do not reflect specialty steels as a
reportable segment. The Company manages the reportable segments as separate
strategic business units. Differences between the segments include manufacturing
techniques and equipment, competition, and end-users. The Company measures
segment performance based on earnings before interest, taxes, depreciation and
amortization, other postretirement benefits, work force reduction charges and
other (income) loss, net ("EBITDA, as defined").
HOT-ROLLED
Hot-rolled bars are processed from blooms and billets on rolling mills to change
the internal physical properties, size or shape of the steel. Desirable
characteristics of hot-rolled bars include internal soundness, uniformity of
chemical composition and freedom from surface imperfection. The Company's
hot-rolled bar products include rounds, squares and hexagons, in both
cut-lengths and coils. Customers for hot-rolled bar products include
manufacturers of automotive parts, industrial equipment, independent forgers,
steel service centers and converters. The Company's hot-rolled bars are used in
the manufacture of end-use products such as automotive drive trains, engine and
transmission parts, bearings and tractor components.
COLD-FINISHED
Cold-finishing is a value-added process which improves the physical properties
of hot-rolled bars. Cold-finished bars are produced from hot-rolled bars by
cold-drawing, turning, grinding, thermal treating or a combination of these
processes. The manufacturing process allows for production of products with more
precise size and straightness tolerances, as well as improved strength and
surface finish, that provides customers with a more efficient means of producing
a number of end products by often eliminating processing steps in the customers'
use of the products. The Company's cold-finished bar products include rounds,
squares, hexagons, and flats, all of which can be further processed by turning,
grinding or polishing, or a combination thereof. Customers for cold-finished bar
products include manufacturers of automotive parts, industrial equipment, steel
service centers and distributors. The Company's cold-finished bars are used in
the manufacture of end-use products such as automotive steering assemblies,
electrical motor shafts, ball and roller bearings, valves and hand tools.
Prior to August 13, 1999, intersegment sales were made at current market prices
and were eliminated in consolidation.
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1999
-----------------------------------------------------------------------
Inter
Cold- Total Segment
Hot-rolled finished Segments Elimination Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $ 215,628 $ 70,259 $ 285,887 $ (24,170) $ 261,717
Depreciation and amortization 14,649 1,788 16,437 -- 16,437
Segment profit (EBITDA, as defined) (18,953) (4,759) (23,712) -- (23,712)
Capital expenditures 31,089 1,674 32,763 -- 32,763
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1998
----------------------------------------------------------------------
Inter
Cold- Total Segment
Hot-rolled finished Segments Elimination Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $ 59,975 $ 53,923 $ 113,898 $ (25) $ 113,873
Depreciation and amortization 3,321 808 4,129 -- 4,129
Segment profit (EBITDA,
as defined) (10,324) 1,142 (9,182) -- (9,182)
Capital expenditures 5,588 511 6,099 -- 6,099
For the Nine Months Ended September 30, 1999
--------------------------------------------------------------------------------
Inter
Segment
Cold- Total Elimination/
Hot-rolled finished Segments Other Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $ 492,476 $ 247,980 $ 740,456 $ (56,123) $ 684,333
Depreciation and amortization 28,364 5,803 34,167 -- 34,167
Segment profit (EBITDA,
as defined) (20,317) (3,433) (23,750) -- (23,750)
Segment assets 1,055,292 170,351 1,225,643 154,587 1,380,230
Capital expenditures 46,289 5,442 51,731 -- 51,731
For the Nine Months Ended September 30, 1998
---------------------------------------------------------------------------------
Inter
Segment
Cold- Total Elimination/
Hot-rolled finished Segments Other Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $ 171,020 $ 104,467 $ 275,487 $ (25) $ 275,462
Depreciation and amortization 4,957 2,090 7,047 -- 7,047
Segment profit (EBITDA,
as defined) (15,324) 6,825 (8,499) -- (8,499)
Segment assets 515,735 167,594 683,329 191,686 875,015
Capital expenditures 13,506 1,178 14,684 -- 14,684
</TABLE>
13. RELATED PARTY TRANSACTIONS
From April 1996 to August 13, 1999, Blackstone and Veritas received annual
monitoring fees from Bar Tech equal to $875 per year pursuant to a monitoring
agreement. Under the terms of the monitoring agreement, Blackstone and Veritas
provide management and financial monitoring services to Bar Tech. Blackstone and
Veritas have split the monitoring fees paid evenly between them. Blackstone and
Veritas have also been reimbursed by Bar Tech for their out-of-pocket expenses
incurred in providing such services.
In connection with the acquisition of Republic in 1998, RES Holding paid
transaction fees of $3,400 to Blackstone and $800 to Veritas and reimbursed them
for all related out-of-pocket expenses. In addition, pursuant to a monitoring
agreement entered into with RES Holding, Blackstone and Veritas were entitled to
receive an annual monitoring fee for providing management and financial
monitoring services equal to $1,125, with Blackstone receiving 75% and Veritas
receiving 25% of this monitoring fee. Blackstone and Veritas have also been
reimbursed by RES Holding and Republic for their out-of-pocket expenses incurred
in providing these services. Approximately $2,400 of accrued but unpaid Bar Tech
and RES Holding monitoring fees were paid following the Combination.
26
<PAGE> 27
In connection with the Combination, the Company paid transaction fees in the
aggregate of $4.0 million to Blackstone, Veritas, USX Corporation and affiliates
of Kobe Steel, Ltd. In addition, the Company reimbursed or is expected to
reimburse Blackstone, Veritas, USX Corporation and Kobe Steel, Ltd. for their
out-of-pocket expenses related to the Combination. Upon consummation of the
Combination, the Company entered into a new monitoring agreement with
Blackstone, Veritas, USX Corporation and Kobe Steel, Ltd. that replaced the
existing monitoring agreements regarding Bar Tech and Republic, with the parties
to receive an aggregate annual fee of $4.0 million.
In addition, in the future, Blackstone, Veritas, USX Corporation and Kobe Steel,
Ltd. or their affiliates may receive customary fees for other advisory and
transactional services rendered to the Company. If such services are rendered in
the future, the fees will be negotiated from time to time on an arms-length
basis and will be based on the services performed and the fees charged to third
parties for comparable services.
During the period from August 13, 1999 to September 30, 1999, the period from
January 1, 1999 to August 12, 1999 and the nine months ended September 30, 1998,
the Company had approximately $13.5 million, $54.2 million and $67.8 million,
respectively, of net sales to American Axle & Manufacturing, a company
controlled by Blackstone. All such sales were in the ordinary course of
business.
The Company and Haynes, a company controlled by Blackstone, are parties to a
facilities management agreement dated as of April 15, 1999, by which Haynes
agreed to manage the Company's Baltimore, Maryland and Canton, Ohio specialty
steel finishing facilities. The Company continues to own these facilities and
must approve all material expenditures and financial decisions of Haynes with
respect to these facilities. As compensation for the services provided, Haynes
receives management fees equal to the total compensation costs, including
benefits, of the Haynes personnel providing management services to the Company
that is allocable to the time these personnel devote to these facilities. In
addition, Haynes is reimbursed by the Company for all of its reasonable
out-of-pocket expenses incurred in connection with the provision of management
services. The Company is in the process of selling its specialty steels
business to Haynes.
In connection with the Combination, the Company entered into the following
agreements with USX Corporation, Kobe Steel, Ltd. and FirstEnergy Service Corp.
(another equity investor in the Company's indirect parent) or their affiliates:
ROUND SUPPLY AGREEMENT
The Company entered into a five-year supply agreement with USX Corporation and
the new tubular steel joint venture between USX and Kobe Steel, Ltd., which
provides for the tubular joint venture purchasing all of its requirements for
steel rounds at its Lorain, Ohio pipemill from the Company up to a maximum of
400,000 tons per year for a price equal to our production costs plus an agreed
upon margin per ton. The tubular joint venture also has the right to purchase up
to an additional 200,000 tons per year for a price equal to the Company's fixed
production costs plus an agreed upon margin per ton. If the tubular joint
venture is unable to purchase at least 400,000 tons of steel rounds per year for
its Lorain, Ohio pipemill, USX is required to purchase any shortfall, under
specified circumstances, to satisfy the steel round requirements of its
Fairfield, Alabama pipemill facility that can not be satisfied from USX's
internal production of steel rounds.
COKE SUPPLY AGREEMENT
The Company entered into a five-year supply agreement with USX Corporation,
which provides that RTI purchase substantially all of its requirements for coke
for use in its Lorain, Ohio blast furnace from USX Corporation. The purchase
price for coke is based on market prices and adjusted annually, subject to most
favored nations provisions for price and other conditions, which allow the
Company to receive the most favorable terms that USX Corporation grants to any
of its coke customers.
PELLET SUPPLY AGREEMENT
Under this agreement, we agreed to purchase all of our iron ore pellet
requirements for our Lorain, Ohio blast furnace from USX Corporation for a
period of five years. The purchase price for pellets is generally based on
market prices and will be adjusted annually, subject to most favored nation
provisions for price and other conditions, which allow us to receive the most
favorable terms that USX Corporation grants to any of its pellet customers.
TECHNOLOGY TRANSFER AGREEMENTS
The Company entered into technology transfer and related agreements with Kobe
Steel, Ltd. and one of its affiliates which provides us with a license to use
various Kobe technology and requires Kobe to provide us with various technical
assistance in return for annual payments to Kobe of approximately $1 million.
27
<PAGE> 28
SAFE HARBOR LEASE MATTERS AGREEMENT
Pursuant to the master restructuring agreement, we received certain property
formerly owned by USS/Kobe that qualifies as "Safe Harbor Lease Property," thus
affording USX Corporation and Kobe with tax benefits. The Safe Harbor Lease
Matters Agreement contains covenants and warranties to ensure that the property
remains qualified as Safe Harbor Lease Property and to ensure the continuation
of the tax benefits.
ENERGY MANAGEMENT AGREEMENT
In connection with the consummation of the Combination, we entered into an
agreement with FirstEnergy Services Corp. under which we appointed FirstEnergy
as our exclusive representative for the procurement of energy supply and
services. As a result of this arrangement, it is likely that much of our energy
purchasing requirements will eventually be filled by FirstEnergy. Also in
connection with the consummation of the Combination, FirstEnergy purchased $30
million of the Series C convertible preferred stock of Republic Technologies
International, Inc. (the Company's indirect parent.)
In connection with the Combination, the Company also entered into an agreement
with the new tubular steel joint venture between USX Corporation and Kobe Steel,
Ltd. regarding the provision of various utilities and an agreement with USX
Corporation regarding the provision of various transitional services. In
addition, at the closing of the Combination, the Company entered into an
agreement with USX Corporation regarding payment of certain payables owed by
USS/KOBE Steel Company to USX Corporation.
14. LONG-TERM COMMITMENTS
On December 3, 1998, Republic entered into a technical exchange agreement with
Sanyo Special Steel Company of Japan ("Sanyo") for a total of $6,000. The
forty-eight (48) month agreement involves technical assistance in melting,
refining, and casting technologies. Republic also entered into an agreement to
share in the cost and benefits of a similar agreement between Bar Tech and Sanyo
dated January 25, 1999. The Bar Tech and Sanyo agreement is also for a period of
forty-eight (48) months with total payments of $6,000. Obligations under both
agreements as of September 30, 1999 are as follows: fourth quarter 1999--$600;
2000--$2,400; 2001--$2,400; 2002--$1,200; and 2003--600.
15. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings, including various
environmental proceedings with governmental authorities, product liability
litigation, and claims by present and former employees under federal and
counterpart state anti-discrimination and other laws relating to employment.
Except for certain environmental proceedings which, if adversely determined,
could have a material adverse effect, the Company does not believe that any of
these proceedings, either individually or in the aggregate, will have a material
adverse effect on the consolidated financial condition, results of operations or
cash flows of the Company.
16. ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of federal, state, and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes, and
the remediation of contamination associated with the disposal of waste. The
Company continuously monitors its compliance with such environmental laws and
regulations and, accordingly, believes that it is currently in substantial
compliance with such laws and regulations. The Company anticipates approximately
$5,000 of material expenditures during the next 24 months for environmental
control measures. As is the case with most steel producers, the Company could
incur significant costs related to environmental compliance, in particular those
arising from remediation costs for historical waste disposal practices at
certain of the Company's facilities. The Company believes that these costs are
most likely to be in the range of $10,000 to $24,000 over the lives of the
Company's facilities. This range represents the estimated aggregate cost to
resolve the environmental contingencies. The Company does not anticipate any
third-party recoveries. The reserve to cover potential current and noncurrent
environmental liabilities was approximately $17,000 and $15,400 as of September
30, 1999 and December 31, 1998, respectively, substantially all of which is
classified as a long-term obligation in the accompanying consolidated/combined
balance sheets.
28
<PAGE> 29
The reserve has been established and is monitored based on continuing reviews of
the reserve, each matter comprising the reserve, and whether any new matters
should be included in the reserve, using currently available information
relative to enacted laws and regulations and existing technology. These reviews
are performed periodically by an in-house committee comprised of representatives
experienced in environmental matters from the environmental, operating, and
accounting departments in consultation with outside legal and technical experts,
as necessary.
17. DISCONTINUED OPERATIONS
In connection with its acquisition of Republic, the Company intends to sell its
specialty steel division and accordingly, the accompanying consolidated
financial statements reflect that division as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30. All revenues and
expenses related to the specialty steels division since the date Republic was
acquired have been reported as adjustments to the allocation of the purchase
price of the Republic acquisition.
In April 1999, the Company entered into an agreement with Haynes, a leading
manufacturer of nickel and cobalt based alloys, to manage the Company's
Specialty Steels division. According to the terms of the agreement, the Company
pays Haynes a management fee based upon the allocable portion of total costs
incurred by Haynes attributable to management activities of the combined
operations. The Company and Haynes are affiliates as both companies are
controlled directly or indirectly by entities associated with The Blackstone
Group. The Company is currently in the process of selling its specialty division
to Haynes. Management anticipates the sale to be complete by year-end, although
certain transfers and payments may occur in 2000.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales $ 9,894 $ 6,116 $ 35,780 $ 6,116
Gross profit (loss) (1,197) (129) (3,114) (129)
Income (loss) before income taxes $ (1,814) $ (506) $ (5,057) $ (506)
Provision for income taxes -- -- -- --
---------------------- ----------------------
Net income (loss) $ (1,814) $ (506) $ (5,057) $ (506)
====================== ======================
</TABLE>
The components of net assets of discontinued operations included in the
Company's balance sheets as assets held for sale were as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Assets held for sale, current - Inventories $15,091 $14,722
======= =======
Assets held for sale, non-current - Property, plant and
equipment $11,687 $11,687
======= =======
</TABLE>
18. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment; therefore, they cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
- - Cash equivalents, accounts receivable, and accounts payable - The carrying
amount approximates fair value because of the short-term maturity of these
instruments.
- - Long-term debt - The fair value of the Senior Notes classified under
long-term debt (Note 7, based on quoted market values, was approximately
$399.5 million as of September 30, 1999. The Company estimates that the
fair value of the 8 1/4 percent Solid Waste Revenue Bonds, Series 1994,
and the 9 percent Solid Waste Revenue Bonds, Series 1997, classified under
long-term debt (Note 7) was approximately $21,210 and $56,385,
respectively, as of September 30, 1999. All other debt classified as long
term on September 30, 1999, is recorded at cost which approximates fair
value.
29
<PAGE> 30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
GENERAL
The Company is the largest producer of special bar quality steel products in the
United States with a market share of approximately 23%, based on 1998 calendar
year pro forma shipments. SBQ steel products are high quality hot-rolled and
cold-finished carbon and alloy steel bar and rod used primarily in critical
applications in automotive and industrial equipment. SBQ steel products are sold
to customers who require precise metallurgical content and quality
characteristics. SBQ steel products generally contain more alloys and sell for
substantially higher prices than merchant and commodity steel bar and rod
products. The Company produces the widest range of SBQ steel products in the
United States and supplies a diverse customer base that includes leading
automobile and industrial equipment manufacturers and their first tier
suppliers.
FACTORS AFFECTING RECENT PERFORMANCE
The Company's financial results for the third quarter ended September 30, 1999
have differed substantially from the results for the period assumed in
previously published projections. The Company included various projected
financial and operating information in the offering memorandum relating to the
private offering of the senior secured notes and these projections, together
with, among other things, risk factors relating to the projections and the
business, were subsequently included in a Current Report on Form 8-K filed with
the Commission by Republic Technologies International, Inc. (RTI's indirect
parent company), as required by the purchase agreement relating to the private
offering.
In the three months ended September 30, 1999 there was a significant shortfall
in shipment volume relative to the assumption for the third quarter used in
developing the projections and actual results for the second quarter:
<TABLE>
<CAPTION>
Pro Forma Information*
---------------------------------------------------------------------
Actual Assumption Actual
For the Three For the Three For the Three
Months Ended Months Ended Months Ended
June 30, 1999 September 30, 1999 September 30, 1999
----------------- ---------------------- ----------------------
(tons in thousands)
<S> <C> <C> <C>
Hot-rolled 457.8 472.0 386.9
Semi-finished 106.8 104.1 134.9
Cold-finished 111.5 134.0 99.8
</TABLE>
*Includes results for Bar Tech, Republic and USS/Kobe assuming the
Combination occurred at the beginning of the period.
The Company believes that the significant drop-off in third quarter shipments
reflects difficult market conditions in the non-automotive sector which led to
lower volumes and lower prices including reduced volumes at key customers.
Management believes that shipments to service centers especially suffered due to
continued high inventory levels coupled with a resurgence in imports. In
addition, shipments were significantly impacted by problems encountered in
integrating the three companies, particularly in the area of computer systems
processing orders and shipments, affecting customer service. For example,
significant problems were experienced with existing SAP information systems used
at the Lorain facility. The Company also had problems with systems at the
Lackawanna facility, a former Bar Tech facility, which were converted to systems
employed at Republic. Production was also adversely affected by a burn-through
fault in one of two basic oxygen process (BOP) vessels at the Lorain facility
which idled the vessel from September 22 through October 18 and disrupted
production cycles in the other vessel as well as casting and rolling operations
at the Lorain facility. While the Company has adopted measures to address
customer service, systems and facilities integration issues, for as long as
volumes are depressed due to unfavorable market conditions and integration
problems persist, the Company believes that operating results will fall short of
those contained in the projections.
RESULTS OF OPERATIONS
The consolidated/combined results of operations include Bar Tech for the three
and nine months ended September 30, 1999 and 1998, Republic for the period from
September 8, 1998 to September 30, 1998 and for the three and nine months ended
September 30, 1999, and for USS/Kobe for the period from August 13, 1999 to
September 30, 1999. The results for Republic and USS/Kobe are included from
their respective acquisition dates. Accordingly, prior period results are not
comparable with the current periods.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
30
<PAGE> 31
Net sales for the three months ended September 30, 1999 totaled $261.7 million
on shipments of approximately 517,270 net tons compared with net sales of $113.9
million for the three months ended September 30, 1998 on shipments of
approximately 193,198 tons. Net sales for the three months ended September 30,
1999 were comprised of $191.4 million for hot-rolled and $70.3 million for
cold-finished, compared with hot-rolled net sales of $60.0 million and
cold-finished net sales of $53.9 million for the three months ended September
30, 1998. The decrease in net selling value per ton in the current year period
is the result of a change in the product mix toward lower selling value products
combined with an overall decrease in selling prices for both hot-rolled and
cold-finished products as the Company initiated efforts to reduce excess
inventory levels.
Cost of sales totaled $260.3 million, or 99.5% of net sales, for the three
months ended September 30, 1999 compared with cost of sales of $114.2 million,
or 100.3% of net sales, for the similar period ended September 30, 1998. Cost of
sales for the three months ended September 30, 1999 consisted of $199.2 million
on hot-rolled products and $61.1 million on cold-finished products compared with
$66.3 million on hot-rolled products and $47.9 million on cold-finished products
for the three months ended September 30, 1998. While cost of sales as a
percentage of net sales remained relatively consistent between the similar
periods in the current and prior years, the improvement in cost of sales
resulting from a decrease in raw material costs was offset by a $4.9 million
write-down in inventory following a reassessment of inventories subsequent to
the Combination.
Selling, general and administrative expenses were $25.0 million, or 9.6% of net
sales, for the three months ended September 30, 1999 compared with $8.8 million,
or 7.7% of net sales, for the three months ended September 30, 1998. The
increase in selling, general and administrative expenses as a percentage of net
sales is primarily due to transaction related expenses incurred in the current
year period related to the Combination.
Net interest expense was $21.5 million for the three months ended September 30,
1999 compared with $9.5 million for the similar period ended September 30, 1998.
The $12.0 million increase in net interest expense was attributable to the
higher average borrowings outstanding following the completion of the
Combination and higher average interest rates of the new borrowings compared to
the borrowings repaid in connection with the Combination.
The provision for income taxes for the three month periods ended September 30,
1999 and 1998, consisted of currently payable income taxes, primarily foreign
income taxes owed by CDSC.
As a result, the Company reported a net loss of $98.9 million for the three
months ended September 30, 1999 compared with a net loss of $22.5 million for
the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
Net sales for the nine months ended September 30, 1999 totaled $684.3 million on
shipments of approximately 1,337,500 net tons compared with net sales of $275.5
million for the nine months ended September 30, 1998 on shipments of
approximately 512,288 tons. Net sales for the nine months ended September 30,
1999 were comprised of $436.36 million for hot-rolled and $248.0 million for
cold-finished, compared with hot-rolled net sales of $171.0 million and
cold-finished net sales of $104,467 million for the nine months ended September
30, 1998. The decrease in net selling value per ton in the current year period
is the result of a change in the product mix toward lower selling value products
combined with an overall decrease in selling prices for both hot-rolled and
cold-finished products as the Company initiated efforts to reduce excess
inventory levels.
Cost of sales totaled $655.7 million, or 95.8% of net sales, for the nine months
ended September 30, 1999 compared with cost of sales of $265.2 million, or 96.3%
of net sales, for the similar period ended September 30, 1998. Cost of sales for
the nine months ended September 30, 1999 consisted of $192.6 million on
hot-rolled products and $463.1 million on cold-finished products compared with
$152.9 million on hot-rolled products and $112.3 million on cold-finished
products for the nine months ended September 30, 1998. The decrease in cost of
sales as a percentage of sales was primarily generated by a decrease in raw
material costs partially offset by a $4.9 million write-down in inventory
following a reassessment of inventories subsequent to the Combination.
31
<PAGE> 32
Selling, general and administrative expenses were $52.3 million, or 7.7% of net
sales, for the nine months ended September 30, 1999 compared with $18.7 million,
or 6.8% of net sales, for the nine months ended September 30, 1998. The increase
in selling, general and administrative expenses as a percentage of net sales is
primarily due to transaction related expenses incurred in the current year
period related to the Combination.
Net interest expense was $61.0 million for the nine months ended September 30,
1999 compared with $22.7 million for the similar period ended September 30,
1999. The $38.3 million increase in net interest expense was attributable to the
higher average borrowings outstanding following the completion of the
Combination and higher average interest rates of the new borrowings compared to
the borrowings repaid in connection with the Combination.
The provision for income taxes for the nine month period ended September 30,
1999 and 1998, consisted of currently payable income taxes, primarily foreign
income taxes owed by CDSC.
As a result, the Company reported a net loss of $202.0 million for the nine
months ended September 30, 1999 compared with a net loss of $37.7 million for
the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs relate to working capital needs, funding
requirements relating to its agreement with the Pension Benefit Guaranty
Corporation, capital expenditures and other costs relating to the Company's
consolidation plan, debt service requirements and tax distributions to the
Company's parent company's members.
The Company has agreed with the Pension Benefit Guaranty Corporation to fund
$178 million over the next four years into the Republic Engineered Steels, Inc.
USWA Defined Benefit Plan, a defined benefit pension plan for employees
represented by the United Steelworkers union in connection with the headcount
reduction and related early retirement benefits contemplated by the
Consolidation Plan. Of the $178 million, $54.5 million has been funded to date
with an additional $7.5 million to be funded by January 1, 2000. After such time
we will be required to make the additional quarterly contributions in accordance
with the following schedule: $7.5 million per quarter for the next two payments,
$7.6 million per quarter for the next four payments, $9.1 million per quarter
for the next four payments and $8.5 million per quarter for the final four
payments. In addition, pursuant to the Consolidation Plan, the Company will
offer a combination of early retirement buyout packages and voluntary severance
plans to our employees, which the Company currently expects will include
expenditures outside its defined benefit plan of up to approximately $36 million
over the next 5 years. The actual cost of the early retirement buyout packages
and voluntary retirement plans will depend on the mix of such arrangements
offered to and accepted by our hourly employees represented by the United
Steelworkers union.
In addition, with respect to the USS/Kobe Union Eligible Pension Plan, a defined
benefit plan for union employees, the Company has agreed with the Pension
Benefit Guaranty Corporation to maintain a specified level of funding based on
statutory funding requirements. The contributions shall be made as follows: for
the year 2000, an amount necessary to avoid an accumulated funding deficiency
plus $4 million; for 2001, an amount so that the December 31, 2001 credit
balance equals that of December 31, 2000 with interest plus $2 million; for
2002, an amount so that the December 31, 2002 credit balance equals that of
December 2001 with interest plus $2 million; for 2003, an amount so that the
December 31, 2003 credit balance equals that of December 31, 2002 with interest
plus $2 million. Beginning with 2004, the Company shall make contributions to
maintain the December 31, 2003 credit balance with interest. As security for
such obligation, the Company has provided that Pension Benefit Guaranty
Corporation with a $5 million letter of credit. The Company currently estimates
that approximately $53.6 million of fundings will be required in connection with
these obligations.
The Company's four year consolidation plan contemplates capital expenditures of
$2.3 million for the remainder of 1999, $48 million in 2000, $56 million in
2001, $113 million in 2002 and $88 million in 2003.
In conjunction with the Combination, the Company completed a private offering of
$425 million of senior secured notes and warrants and entered into the $425
million new credit facility. RTI applied the proceeds of this private offering,
together with approximately $239 million of borrowings under the new credit
facility and the proceeds from new equity contributions, to refinance a
substantial portion of the indebtedness of Republic, RES Holding, Bar Tech and
USS/Kobe.
32
<PAGE> 33
As a result of the Combination and the other transactions, the Company has
significant amounts of debt, with the interest payments on the senior secured
notes and interest and principal repayments under the new credit facility
representing significant obligations. The senior secured notes will require
semi-annual interest payments and mature on July 15, 2009. The senior secured
notes require that tender offers be made for such securities with certain
proceeds from asset sales in the event that such proceeds are not applied to
specified purposes within certain time periods. The loan under the new credit
facility will require periodic payments of interest and mature on August 13,
2004. The new credit facility requires prepayment of loans and reductions of
commitments with net proceeds of specified asset dispositions, casualty and
condemnation recovery events, issues of equity and incurrences of permitted
indebtedness. The 1984 environmental improvement revenue bonds, of which $9.0
million was outstanding as of September 30, 1999, mature on December 1, 2001. In
addition, the $5.5 million Series A Preferred Stock of Republic Technologies
International, Inc. is mandatorily redeemable on September 26, 2000, payment for
which is expected to be made by Republic Technologies International, Inc. from
distributions or loans from the Company.
The senior secured notes and the new credit facility each contain significant
affirmative and negative covenants including separate provisions imposing
restrictions on additional borrowings, certain investments, certain payments,
sale or disposal of assets, payment of dividends and change of control
provisions, in each case, subject to certain exceptions.
The senior secured notes are secured, subject to exceptions and limitations, by
(1) a first priority lien on, and security interest in, substantially all of the
existing assets of the issuers and the restricted subsidiaries, other than (a)
the CAST-ROLL(TM) and Cartersville, Georgia facilities, (b) inventory, (c)
accounts receivable and (d) intellectual property and related assets, and (2) a
first priority lien, shared on an equal and ratable basis with the lenders under
the new credit facility, on the equity interests of the Company and its
restricted subsidiaries. This collateral is subject to release without
substitution under a number of circumstances. Borrowings under the new credit
facility are secured by a first priority perfected security interest in (1) the
equity interests of the Company and its restricted subsidiaries, shared on an
equal and ratable basis with the senior secured notes and (2) all presently
owned and subsequently acquired accounts, inventory, intellectual property and
related assets of the Company and guarantors and the real estate and fixed
assets comprising, and the intellectual property relating to, the CAST-ROLL(TM)
facility, including the related melt shop.
The obligations under the senior secured notes are unconditionally and
irrevocably guaranteed jointly and severally by the Company's parent and each of
its subsidiaries other than the Company, RTI Capital Corp. (the co-issuer of the
senior secured notes) and Oberlin Insurance Company. The obligations under the
new credit facility are unconditionally and irrevocably guaranteed jointly and
severally by the Company's parent and each of its subsidiaries other than the
Company and Oberlin Insurance Company.
The Company is a limited liability company that will be treated as a partnership
for income tax purposes and accordingly are not an income taxpaying entity.
However, pursuant to the limited liability company agreement of the Company's
parent, the Company's parent will be required to make cash distributions to its
members to the extent necessary to satisfy tax obligations regarding members'
investment in Republic Technologies International, Inc. To the extent the
Company's parent is required to make these tax distributions, the Company will
be required to make equivalent cash distributions to its parent. However, the
Company believes that certain of its parent's members have net operating loss
carryforwards which may be available to offset a significant portion of their
taxable income attributable to their investment in us and reduce but not
eliminate, the need for tax distributions. Use of these net operating losses is
subject to various limitations and uncertainties and accordingly, the Company
cannot make any assurances that these net operating loss carryforwards will
reduce the need for tax distributions or that they will not be otherwise
utilized.
The Company intends to fund its working capital, cash pension contribution
requirements, capital expenditure, debt service requirements and tax
distributions to its parent company's members through cash flows generated from
operations and borrowings under the $425.0 million new credit facility.
Availability under the new credit facility is limited to a borrowing base equal
to (1) 60% of eligible inventory, plus (2) 85% of eligible accounts receivable,
plus (3) the lesser of 67% of the appraised value of the CAST-ROLL(TM) facility
and $125 million, which will decrease by $4.5 million per quarter beginning the
quarter ended December 31, 2000, minus (4) a reserve between $35.0 million and
$50.0 million. The CAST-ROLL(TM) facility is subject to reappraisal after March
31, 2001 or upon a default under the new credit facility. As of September 30,
1999, approximately $300.2 million was outstanding under the new credit
facility, leaving undrawn commitments of approximately $107.8 million.
33
<PAGE> 34
In connection with the Combination, RTI issued 30,000 shares of its Series C
convertible preferred stock. The Series C convertible preferred stock accrues
dividends at a rate of 5% per year, which can be paid in cash or by the issuance
of additional shares of Series C convertible preferred stock at the election of
Republic Technologies International, Inc.
In the light of market and integration difficulties discussed above under
"Factors Affecting Recent Performance", the Company has sought to improve its
liquidity position by scaling back operations at its Johnstown facility and
reducing inventory. Notwithstanding these efforts, however, Republic
Technologies may need to borrow additional funds under its revolving credit
agreement or, to the extent that the funds are not available thereunder, to
obtain additional financing to meet its cash flow requirements.
Because the specialty steels market is distinct from the SBQ market, the Company
is currently in the process of selling its specialty division to Haynes
Management anticipates the sale to be complete by year-end, although certain
transfers and payments may occur in 2000.
In connection with its consolidation plan, the Company intend to construct a new
large bar mill, with groundbreaking occurring in 2001 and completion expected in
2002. Management expects the cost of constructing this facility will be
approximately $90.0 million. The Company anticipates receiving an estimated
$30.0 million in government assisted borrowings to fund a portion of this
construction.
As is the case with most steel producers, we could incur significant costs
related to environmental issues in the future, in particular those arising from
remediation costs for historical waste disposal practices at our facilities. Our
operations are subject to environmental laws and regulations that in the event
of environmental contamination at our facilities may generate significant
liability.
Management believes that cash generated from operations, together with amounts
under the new credit facility and government assisted borrowings expected to be
obtained, will be sufficient to meet our working capital, cash pension
contribution, capital expenditure, debt service requirements and other cash
needs, for the foreseeable future. However, there can be no assurance that this
will be the case. The Company may consider other options available in connection
with future liquidity needs, including the issuance of additional debt and
equity securities.
In addition, pursuant to the new labor agreement, Republic Technologies
International, Inc. intends to offer to sell to our employees up to $15.0
million worth of its common stock on the earliest of (1) January 1, 2001, (2)
immediately preceding RTI proceeding with an initial public offering or (3) a
change of control.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
recently enacted by the FASB. SFAS No. 133, as amended by SFAS No. 137,
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective for fiscal years beginning after June 15,
2000. We have not yet determined the impact that the adoption of this standard
will have on our financial statements.
34
<PAGE> 35
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer
equipment, software and other devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to do the following:
- - receive orders;
- - manufacture product;
- - ship inventory;
- - process transactions;
- - send invoices;
- - deposit cash; and
- - engage in other normal business activities.
The Company's inability of business processes to function properly in year 2000
could have adverse effects on companies and entities throughout the world.
We presently believe that we have effective plans in place to anticipate and
resolve the potential Year 2000 issues at all of our former Republic, Bar Tech
and USS/Kobe facilities. In the event, however, that we do not properly and
fully anticipate and resolve all Year 2000 issues, Year 2000 issues may
materially impact and adversely affect our results of operations and our
relationships with third parties.
After consummation of the Transactions, we began consolidating and integrating
the information systems of Republic, Bar Tech and USS/Kobe. Since Republic and
Bar Tech have begun operating under common management, these two companies
developed a joint plan for Year 2000 compliance, which is summarized below.
Prior to the Combination, USS/Kobe Steel Company had also developed a compliance
plan, which is discussed separately below.
REPUBLIC AND BAR TECH. We have developed integrated plans to address issues
related to the impact of Year 2000 in four major areas at Republic and Bar Tech:
- - infrastructure;
- - business applications;
- - plant applications; and
- - suppliers.
The infrastructure portion of the program addresses wide and local area
networks, servers, personal computing, telecommunications systems and software,
fax and facility security systems. Each location's equipment has been
inventoried and assessed for Year 2000 problems. Some Republic and Bar Tech
facilities have completed the remediation process through replacement or
upgrade, and have been tested. As of September 30, 1999, this portion of the
program is approximately 90% complete. The remaining Republic and Bar Tech
facilities are scheduled to be completed by December 1999.
The business application portion of the program addresses applications and
system software that run on the larger mainframe and mid-range computers. These
systems are being upgraded and/or replaced with new applications to provide Year
2000 readiness. As of September 30, 1999, substantially all of this program area
has been completed.
Our plant systems include hardware, software and associated embedded computer
technologies that are used to operate our manufacturing facilities. These
systems have been inventoried and adequately assessed. Five Republic and Bar
Tech plant sites have completed remediation and testing. The final plant site is
scheduled for remediation and testing in November 1999.
We are currently assessing the impact of the Year 2000 issue as it relates to
the suppliers and customers of Republic and Bar Tech to identify the extent to
which we may be vulnerable in the event those parties fail to properly resolve
their own Year 2000 issues. Readiness questionnaires were sent to our Republic
and Bar Tech supplier base. Through September 30, 1999, less than 25% of the
suppliers surveyed had responded.
35
<PAGE> 36
USS/KOBE. USS/Kobe Steel Company formed a multi-functional Year 2000 task force
to execute a preparedness plan addressing the readiness of USS/Kobe Steel
Company's business systems, technical infrastructure, end-user computing,
manufacturing, environmental operations, systems products produced and sole and
dedicated research and development facilities. To assist in assessing Year 2000
compliance and readiness, the management of USS/Kobe Steel Company engaged
specialized information technology consultants.
Prior to the Combination, USS/Kobe finished its Year 2000 assessment and
modified or replaced and tested portions of its critical software and hardware
enabling its financial and operating systems and processes to achieve Year 2000
readiness. The Year 2000 compliance plan of relating to the former USS/Kobe
operations is on schedule with targeted objectives, including integration
testing. The former USS/Kobe operations are at an 85% state of Year 2000
readiness and is scheduled for completion by December 1999.
Prior to the Combination, USS/Kobe Steel Company began a program of querying
significant third parties, including suppliers, utility and other resource
providers and customers to assess their Year 2000 readiness. This program is
substantially complete, and the management has not been made aware of any third
parties significant to the former USS/Kobe operations that were not, or did not
plan to be, Year 2000 ready.
REMEDIATION COSTS. The cost of the Year 2000 projects of Republic, Bar Tech and
USS/Kobe is estimated at $4.8 million and is being funded through operating cash
flows. We incurred approximately $3.5 million of these costs as of September 30,
1999 and expect to incur the remaining amounts through year 2000. The cost of
replacement hardware and software will be capitalized as appropriate according
to our capital policies and amortized over the applicable useful lives.
The estimated costs and dates by which we believe we will have completed our
objectives are based on our management's best estimates, which rely on numerous
assumptions regarding future events, including the availability of key
resources, third-party remediation plans, and other factors. These estimates,
however, may prove to be inaccurate, and actual results could differ materially
from those anticipated. Factors that could result in material differences
include the availability and cost of personnel with the appropriate training and
experience, the ability to accurately identify, assess, remediate and test all
relevant computer codes and embedded technology, and similar uncertainties. In
addition, Year 2000 issues may lead to possible third-party claims, the impact
of which cannot be estimated at this time. The aggregate cost of defending and
resolving such claims, if any, may have a material adverse effect on our
business, results of operations and financial condition.
CONTINGENCY PLANS. As part of the Year 2000 readiness plans, we are continuing
to assess the risks associated with the potential system failures of our
suppliers, banks, utilities and internal systems. We are developing contingency
plans for these failures, which may include, but are not limited to the use of
alternative suppliers and developing alternative manual systems. We currently
believe that the most reasonably likely worst case scenario for our operations
with respect to the Year 2000 issue would include the following:
- - the inability to sustain our current level of shipments;
- - inability to bill or invoice; and
- - a decrease in operational efficiency as a result of the increase in
manual processing efforts.
These problems could result in potential lost sales and profits. We are
continuing to develop our contingency plans to address these potential
disruptions to our business.
36
<PAGE> 37
FORWARD LOOKING STATEMENTS
Statements included in this filing with the Securities and Exchange Commission
(including those portions of Management's Discussion and Analysis that refer to
the future) may contain forward-looking statements that are not historical facts
but refer to management's intentions, beliefs, or expectations for the future.
It is important to note that the Company's actual results could differ
materially from those projected in such forward-looking statements. Certain
factors that could cause actual results to differ from those in such
forward-looking statements include, but are not limited to, the following:
The inability of the Company to achieve the objectives of rationalizing and
modernizing production facilities or delays in the achievement of such
objectives;
Any substantial unanticipated delays or difficulties in integrating the
operations of or managing the capital resources and liquidity of the
Company, Republic and USS/Kobe on a combined basis;
Any substantial delay in the implementation of the Company's plans or
substantial unanticipated costs associated with its plans for workforce
reductions;
The ability of the Company to sell its products in its targeted markets at
gross margins necessary to produce and maintain positive operating income.
The Company's success is dependent on its ability to increase sales. The
Company is in the process of enhancing its sales and customer service
programs;
The Company is subject to a variety of competitive factors such as pricing,
the financial strength of its competitors and the Company's ability to
establish a favorable position in the steelmaking and bar rolling industry.
The Company's competitive position could also be adversely affected by any
consolidation of its competition in the steelmaking industry; and
The ability of the Company and its major suppliers to remedy its Year 2000
issues timely and in a cost-effective manner.
37
<PAGE> 38
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
The Company and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that except for certain environmental
proceedings which, if adversely determined, could have a material adverse
effect, these matters will not materially affect the Company's consolidated
financial position, results of operations or cash flows.
Environmental Matters
- - The domestic steel industry is subject to a broad range of environmental
laws and regulations, including those governing the following:
- - discharges into the air and water;
- - the handling and disposal of solid and hazardous wastes;
- - the remediation of soil and groundwater contamination by petroleum products
or hazardous substances and wastes; and
- - the health and safety of its employees.
The Company continuously monitors its compliance with these environmental laws
and regulations and believes that it currently is in substantial compliance with
them. The Company anticipates that its expenditures for environmental control
measures during the next twenty-four months will be approximately $5 million.
As is the case with most steel producers, the Company could incur significant
costs related to environmental issues in the future, in particular those arising
from remediation costs for historical waste disposal practices at its
facilities. The Company currently believes that these costs for Republic are
likely to be in the range of $8.9 million to $22.3 million over the lives of
Republic's facilities although some third-party estimates are substantially
higher. Republic's reserve to cover probable environmental liabilities,
including the matters discussed below, was approximately $16.2 million as of
September 30, 1999. The Company currently believes that it has no significant
environmental compliance and remediation costs with respect to Bar Tech's
operations and, accordingly, no reserves have been established. As of September
30, 1999, USS/Kobe had a reserve of $361,000 relating to the U.S. EPA
"multimedia" audit which is discussed below. The Company is not otherwise aware
of any significant environmental compliance and remediation costs with respect
to USS/Kobe's operations for which the establishment of a reserve would be
appropriate. To the extent the Company incurs any such remediation costs, these
costs will most likely be incurred over a number of years; however, future
regulatory action regarding historical disposal practices at its facilities, as
well as continued compliance with environmental requirements, may require the
Company to incur significant costs that may have a material adverse effect on
its future financial performance.
The U.S. Environmental Protection Agency has identified a number of solid waste
management units, or "SWMUs," at the Eighth Street facility in Canton, Ohio. On
June 16, 1999, the Company entered into an Administrative Consent Order with the
U.S. EPA to investigate these SWMUs and propose appropriate remedial measures.
The "Berger Triangle," a seven acre parcel of land the Company owns in Canton
that is listed on the U.S. EPA's Comprehensive Environmental Response,
Compensation and Liability Information System list of contaminated or
potentially contaminated sites, is also included within the scope of the
Administrative Consent Order. The Company anticipates that through the year
2004, it will spend approximately $1.8 million to investigate the SWMUs and the
Berger Triangle. However, the Company is currently unable to predict precisely
the amount or timing of the costs it may be required to incur to remediate these
sites, but the cost could be material to its business, results of operations or
financial condition.
38
<PAGE> 39
The electric arc furnace dust waste pile located at the Canton facility has been
exempted from the scope of the Administrative Consent Order discussed above.
However, on April 26, 1999, the Company entered into a Consent Decree with the
Ohio Environmental Protection Agency providing for the closure in-place of that
waste pile. The Company submitted a draft closure plan to the Ohio EPA on July
2, 1999. If the Company can obtain Ohio EPA approval of its closure plan prior
to November 1, 1999, it anticipates initiating closure construction in the
Spring of the year 2000. The Company anticipates that the construction, which
would involve the placement of a 54 inch thick liner on top of the existing
pile, would involve expenditures of approximately $1 million. The Company
estimates that the cost of 30 years of post-closure monitoring and maintenance
of the closed waste pile would be an additional $1 million.
Notices of historical waste disposal activities at one of the two Massillon,
Ohio facilities and the two Canton facilities were filed by LTV Steel and its
predecessors with the U.S. EPA, under Section 103(c) of the federal
Comprehensive Environmental Response, Compensation and Liability Act. In 1985,
the Ohio EPA recommended the Massillon plant as a medium priority for further
state investigation. The Ohio EPA recommended the Harrison Avenue facility in
Canton as a medium priority for further state investigation and a low priority
for further federal investigation. No further investigation of historical waste
disposal activities has been performed at these facilities since 1986 by any
environmental authority. The Company could be required, in the future, to incur
significant costs to investigate such historical waste disposal activities and
remediate any contamination found to exist at these facilities. The Company is
currently unable to predict precisely the amount or timing of such costs.
Through contractual agreements with Bethlehem Steel Corporation, the Company has
sought to reduce the impact of costs arising from or related to actual or
potential environmental conditions at Bar Tech's facilities caused or created by
Bethlehem or Bar Tech's predecessors in title and attributable to the period in
which the Bethlehem BRW Division or Bar Tech's predecessors operated such
facilities. Pursuant to such arrangements, Bethlehem has agreed to indemnify Bar
Tech for such costs by limiting Bar Tech's potential exposure to any such
damages incurred (1) through December 1996, to 50% of the first $2 million in
damages, or $1 million, and (2) thereafter, to 50% of the first $10 million of
damages in the aggregate, or $5 million in total exposure. Although several
investigations of past or present environmental conditions at Bar Tech's
facilities have been conducted by or on behalf of Bethlehem and regulatory
agencies, the reports and results of which have been made available to Bar Tech,
an in-depth, environmental review of Bar Tech's facilities to determine the
potential scope, if any, of required remediation at such facilities has not been
conducted by or on the behalf of Bar Tech. There can be no assurance that
Bethlehem will meet its obligations under the indemnification arrangements or
that there will not be future contamination for which the Company might be fully
liable and that may require it to incur significant costs that could have a
material adverse effect on its business, results of operations or financial
condition.
Bethlehem is conducting remedial activities on a small portion of the
Lackawanna, New York facility historically used for mill scale storage, which
was identified as requiring corrective action by the U.S. EPA pursuant to an
Administrative Order on Consent issued to Bethlehem in 1990. Bethlehem is
currently awaiting approval of the Remedial Work Plan for the former mill scale
storage area submitted to the U.S. EPA in September 1994. Bethlehem is
ultimately liable for compliance with the Administrative Order on Consent and,
while no assurances can be given, the Company believes that Bethlehem is likely
to fulfill these obligations.
Some of the steel processing operations presently conducted by Bliss & Laughlin
Steel Company commenced over 100 years ago by predecessors of Bliss & Laughlin
and included properties which over the years were sold by Bliss & Laughlin's
predecessors. Given the nature and geographic diversity of its current and its
predecessors' former operations, it is possible that claims would be asserted
against Bliss & Laughlin in the future based upon the current property ownership
of Bliss & Laughlin and by operations of Bar Tech's predecessors. Bliss &
Laughlin has received an indemnification from the former owner and operator of
such properties for various environmental claims or liabilities relating to
activities at Bliss & Laughlin's Harvey and Batavia, Illinois and Medina, Ohio
properties prior to October 23, 1984, when Bliss & Laughlin succeeded to
ownership of such properties, and for various environmental claims or
liabilities relating to properties that were sold by Bliss & Laughlin's
predecessors. There can be no assurance that such former owner and operator will
meet its obligation under the indemnification agreements or that there will not
be future contamination for which the Company might be fully liable and that may
require it to incur significant costs that could have a material adverse effect
on its business, results of operations or financial condition.
Canadian Drawn Steel Company, Inc., is also subject to Canadian federal,
provincial, regional and municipal environmental laws and regulations. The
Company believes that it is currently in substantial compliance with applicable
environmental laws and regulations and does not anticipate any material capital
expenditures for environmental control facilities in the future. However, there
can be no assurance that the Company will not be required to incur significant
costs that could have a material adverse effect on its business, results of
operations or financial condition.
39
<PAGE> 40
The Company, as successor to Republic, is a potentially responsible party
regarding one federal Superfund site at which it has disposed of waste. Bliss &
Laughlin Industries, Bar Tech's cold-finishing subsidiary, is also a potentially
responsible party regarding its disposal of waste at two federal Superfund sites
and at a third site that is being remediated under authority of Ohio state law.
USS/Kobe is a potentially responsible party regarding one site being addressed
by the U.S. EPA. While no assurances can be given, the Company does not believe
that the liabilities relating to these sites will have a material adverse effect
on its business, results of operations or financial condition.
The Lorain, Ohio facility has been in continuous operation by USS/Kobe, USX
Corporation and its predecessors for over 100 years. Although the Company is not
aware of any material environmental issues at this facility other than those
described in this prospectus, it believes the long operational history of this
facility poses a significantly greater probability of some form of environmental
contamination than at its newer facilities. Contamination at this facility could
be material to the Company's business, results of operations or financial
condition.
In connection with the formation of USS/Kobe Steel Company in 1989 by USX
Corporation and Kobe Steel, Ltd., USS/Kobe Steel Company obtained a limited
indemnity from USX Corporation concerning identified matters arising out of the
past operation of the melt, bar and tubular facilities at Lorain, Ohio by USX
Corporation and its predecessors. The Company will be the beneficiary of a
portion of this indemnity in the future. The 1989 agreement relating to the
formation of USS/Kobe Steel Company divided environmental responsibility into
several different categories. The first category includes specific areas and
projects for which USX Corporation retained complete responsibility. USX
Corporation retained all responsibility relating to a hazardous waste landfill
referred to as the D-2 Landfill, and for all disposal of waste materials prior
to June 30, 1989 at locations other than the Lorain property. The second
category includes matters that were split between USS/Kobe Steel Company and USX
Corporation.
Two cost sharing baskets and one cost sharing percentage were agreed to by USX
Corporation and USS/Kobe Steel Company as well. One of the cost sharing baskets
provides that USS/Kobe Steel Company will be responsible for the first $10
million of costs and USX will be responsible for costs above that amount
incurred relating to the areas formerly occupied by a coke plant and related
facilities, a sintering plant, and a galvanizing plant. USX Corporation and
USS/Kobe Steel Company subsequently agreed that USS/Kobe Steel Company could
treat $3 million of its expenses in demolishing the coke batteries as
expenditures against this $10 million basket. The second cost sharing basket
provides that USS/Kobe Steel Company will be responsible for the first $9
million of costs related to 13 identified SWMUs that are generally classified as
disposal sites. The percentage cost sharing agreement provides that in the event
of any groundwater remediation, USS/Kobe Steel Company will pay 65% of the cost
and USX Corporation will pay 35% of the cost. In each case, USX Corporation's
obligation to indemnify is limited to cleanup actions specifically required by
government agencies.
Except for these specific indemnities and for specific projects that USX
Corporation agreed to complete, USS/Kobe Steel Company assumed responsibility
for all environmental conditions at the Lorain facility, including regarding
additional SWMUs at the facility that were not included within the scope of the
environmental cost sharing provisions of the 1989 agreement contributing the
Lorain facilities to USS/Kobe Steel Company. Although environmental regulators
have not required action regarding the SWMUs at the Lorain facility, the Company
could incur significant investigation and remediation costs in the future.
However, the Company is currently unable to predict precisely the amount or
timing of the costs it may be required to incur to investigate and remediate the
SWMUs or other potential areas of contamination.
Pursuant to the master restructuring agreement, which sets forth indemnification
and cost sharing arrangements regarding environmental liability at the Lorain,
Ohio facilities, the new 50/50 tubular steel joint venture between USX
Corporation and Kobe Steel, Ltd. will be responsible for environmental
liabilities relating to its operations and to the portions of the real property
at the Lorain site that it owns. As a general matter, the Company will be
responsible for environmental liabilities relating to its operations and to the
portions of the real property at the Lorain site that it owns. There can be no
assurance that the tubular joint venture will meet its obligations under the
indemnification and cost sharing arrangements in the master restructuring
agreement or that there will not be future identification of contamination at
the facilities in Lorain, Ohio for which the Company might be fully liable and
that may require it to incur significant costs that could have a material
adverse effect on its business, results of operations and financial condition.
40
<PAGE> 41
USS/Kobe Steel Company and the U.S. EPA are parties to an April 1992 consent
decree and an April 1999 amendment to this consent decree concerning the blast
furnaces at the Lorain facility. Pursuant to the original consent decree,
USS/Kobe Steel Company paid a $500,000 penalty. The amended consent decree
settled additional past violations by payment of a $440,000 penalty, required
the installation of new continuous emission monitors, included a revised
emission limit for carbon monoxide and established interim emissions limits that
will apply until a permit modification establishing final emission limits is
complete pursuant to the amended consent decree.
USS/Kobe Steel Company was the subject of a "multimedia" audit by the U.S. EPA
beginning in 1997, which included an air, water and hazardous waste compliance
review. The final report and citations have not been issued, but a number of
citations and notices of violation have been issued as a result of the audit.
USS/Kobe Steel Company has already addressed many of the issues pointed out by
U.S. EPA. USS/Kobe Steel Company and the U.S. EPA have entered into a tolling
agreement concerning issuance of the final audit. On July 20, 1999, USS/Kobe
Steel Company had an initial meeting with the U.S. EPA regarding the multimedia
audit. At that time, the U.S. EPA proposed penalties related to alleged
violations of environmental laws addressing water, air and hazardous waste
issues and indicated that it would pursue the negotiation of a consent decree
with USS/Kobe Steel Company relating to the findings of the multimedia audit. It
is possible that such a consent decree, if finalized, will require penalties,
further testing and mandatory and voluntary environmental projects. At this
time, the Company is unable to predict the final outcome of the audit and the
ongoing investigation, but it could result in litigation or material penalties
or other costs. Although the multimedia audit is not generally the subject of an
environmental indemnity, the Company believes that that penalties resulting from
the multimedia audit, to the extent relating to the steel tube facilities at the
Lorain facility, would be under the master restructuring agreement the
responsibility of the new tubular steel joint venture between USX Corporation
and Kobe. To the extent that any penalties relate to discharges of waste water
from the D-2 Landfill, the Company believes those penalties would be indemnified
against by USX Corporation.
In August 1998, the U.S. EPA issued a notice of violation concerning emissions
from the Lorain, Ohio blast furnace casthouse and gas flare stack that allegedly
exceeded opacity limits. The U. S. EPA has stated that it will pursue these
matters as part of the multimedia enforcement action discussed above.
In July and November of 1998, the U.S. EPA issued Findings of Violation and
Order for Compliance alleging that USS/Kobe Steel Company violated its National
Pollutant Discharge Elimination System permit by exceeding permit limits and
allowing unauthorized discharges. The Company believes that there have been a
small number of permit limit exceedences since January 1996 and that these
events are isolated incidents. The U.S. EPA has indicated an intention to pursue
these matters as part of the multimedia enforcement action discussed above.
In September 1998, the Ohio EPA issued a notice of violation regarding an oil
discharge from a storm sewer. USS/Kobe Steel Company remediated this discharge
and in April 1999 submitted to the agency a study that was required by the
notice of violation. No response has been received from the Ohio EPA concerning
this matter.
In December 1992, the Ohio EPA issued a notice of potential violation alleging
that the storage of blast furnace flue dust constitutes unlawful disposal.
USS/Kobe Steel Company contests this characterization and in 1995 submitted to
Ohio EPA a revised waste management plan addressing this and other issues.
USS/Kobe Steel Company has not received a response from the agency.
The pipe mill lagoon, a component of the wastewater treatment system at the
Lorain, Ohio facility, is used by both the Company's operations and the
operations of the new tubular steel joint venture between USX Corporation and
Kobe. Although the Company will be responsible for historical environmental
liabilities at the pipe mill lagoon, on an on-going basis the new tubular steel
joint venture and will share the cost of the continued operation of the pipe
mill lagoon on a basis proportionate to the amount of its respective discharges
to that lagoon. The Company is under no current obligation to upgrade or replace
the pipe mill lagoon, and it does not anticipate that it will do so within the
next three years. However, the Company does anticipate that a project to upgrade
or replace the pipe mill lagoon will occur after this period and the expense
could be material to its business, results of operation or financial condition.
The new tubular steel joint venture has agreed that if it elects to continue to
use the upgraded or replaced pipe mill lagoon, it will bear a portion of the
capital expense proportionate to the amount of its discharge to the shared
facility.
41
<PAGE> 42
Various federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos containing materials, or
"ACMs." Such laws and regulations may impose liability for the release of ACMs
and may provide for third parties to seek recovery from owners or operators of
facilities at which ACMs were or are located for personal injury associated with
exposure to ACMs. The Company is aware of the presence of ACMs at its
facilities, but it believes that such materials are in acceptable condition at
this time. While no assurances can be given, the Company believes that any
future costs related to remediation of ACMs at these sites will not be material,
either on an individual basis or in the aggregate.
ITEM 2. CHANGES IN SECURITIES
- -----------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- -------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(27) Financial Data Schedule
a.) Reports on Form 8-K
None.
42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
REPUBLIC TECHNOLOGIES INTERNATIONAL, L.L.C..
Date: November 22, 1999 By: /s/ Thomas N. Tyrrell
---------------------
Thomas N. Tyrrell
Chief Executive Officer
Date: November 22, 1999 By: /s/ Joseph A. Kaczka
--------------------
Joseph A. Kaczka
Vice President of Finance and Controller
43
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,807
<SECURITIES> 0
<RECEIVABLES> 197,718
<ALLOWANCES> 14,783
<INVENTORY> 275,597
<CURRENT-ASSETS> 488,269
<PP&E> 742,660
<DEPRECIATION> 55,223
<TOTAL-ASSETS> 1,380,230
<CURRENT-LIABILITIES> 684,886
<BONDS> 480,944
0
0
<COMMON> 0
<OTHER-SE> 4,748
<TOTAL-LIABILITY-AND-EQUITY> 1,380,230
<SALES> 684,333
<TOTAL-REVENUES> 684,333
<CGS> 655,743
<TOTAL-COSTS> 655,743
<OTHER-EXPENSES> 145,651
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,008
<INCOME-PRETAX> (178,069)
<INCOME-TAX> 625
<INCOME-CONTINUING> (178,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 23,342
<CHANGES> 0
<NET-INCOME> (202,036)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
